Cayman 2007 - HFMWeek

hFMhedgeFundManagercaYMaNSpecial report2007Follow the leadercayman continues to set the pacefor hedge fund domicilesadmiral | athena | BiSYS | Butterfield | cayman National | citco | conyers Dill & pearman |iMS | Kinetic | KpMG | rSM | Solomon Harris | Spectrum | truman Bodden | UBS |

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asia-pacific special reportcaYMan special report 2007in this issue7 Cayman islands report introductionOverviewYolanda Mccoy, head of the investments andsecurities Division, cayman islands Monetaryauthority gives an overview8 trust in independenceAdministrationpatrick agemian and Kurt Hagerman of citcofund services on the importance of independentadministration to hedge fund services11 independent director services pioneerDirectorship/managementpaul Harris traces the history of internationalManagement services limited and its role in thecayman islands fund industry14 hedge fund valuationAdministrationpeter Young of bisYs Hedge fund servicesexamines the fundamentals of hedge fund portfoliovaluation16 stepping up to the challengeAdministrationDarren stainrod, head of fund services for ubsGlobal asset Management, examines cayman’sstrength in the face of changes in global regulationand service provision in competing jurisdictions19 Look before you leapAuditing/AccountancyGeoff Varga and nick Matthews of Kinetic partnersemphasise the importance of due diligence in thehedge fund space22 A fully informed decisionAuditor/AccountantsJoel Dodson of KpMG outlines financial statementpreparation for hedge funds24 the place to beAdministrationcanover Watson, managing director of admiraladministration in the cayman islands, discusses themodel behind the company’s growth over the pastdecadewww.hfmweek.com HFMWEEK | 5

BISYS’ expertise starteddeveloping LONG ago.You could say that we’ve grown up with the alternativeinvestment business. Since our inception, BISYSAlternative Investment Services, has reached over$275 billion in assets under administration. We supportapproximately 500 clients – both boutique organizationsand global institutions – and over 1,600 funds, includinghedge funds, private equity funds, fund of funds andother alternative investments.The depth of our industry experience and diverse clientbase provides us with the unique capacity to supporthighly complex transactions and structures. Just asefficiently, we can process routine administrative tasksunder tight reporting deadlines.BISYS is a long-term partner with the requisiteknowledge and experience to support your alternativeinvestment programs.For more information please contact BISYS AlternativeInvestment Services:Boston 617-824-1396 (private equity)Cayman Islands 345-949-5884 (hedge)Dublin 353-1-436-7200 (hedge)Hong Kong 852-3658-5410 (hedge/private equity)London 44-207-182-1790 (hedge)New Jersey 973-758-1981 (hedge/private equity)New York 917-472-5960 (hedge)New York 212-447-0909 (private equity)San Francisco 415-645-5455 (hedge/private equity)Bermuda • California • Cayman Islands • England • Hong KongIreland • Massachusetts • New Jersey • New York Ohiowww.bisys.comReal Leadership. Real Results.BISYS ® is a registered trademark of The BISYS Group, Inc.©2007 The BISYS Group, Inc. All Rights Reserved.

asia-pacific special reportcaYMan special report 2007in this issue27 On the road to recoveryAuditing/AccountancyKenneth M. Krys of rsM cayman islands, examinesthe insolvency practitioner’s role30 investment influxAdministrationron suber, president of spectrum Global fundadministration, and Wayne ross, directorof spectrum cayman, discuss the effectsof institutional investment on providers ofadministration and middle-office services32 sPAC to the futureLegala new investment vehicle in the private equitymarket – the special purpose acquisition company– is examined by richard fear of conyers Dill& pearman34 eastern promise for Cayman law firmLegalWilton McDonald of truman bodden & companysays that in a maturing market central and easterneurope offer good opportunities for new hedge fundbusiness38 Best of best worldsLegalnick reid of solomon Harris explains the upside ofhaving side pockets41 An ever changing industryAdministartion/CustodyGreg bennett of butterfield fund services discussespending aiMa valuation standards, industry bestpractice and the impact on administrators45 investor comfortDirectorship servicesallison b. nolan, managing director of athenadiscusses the new key service providers for hedgefunds49 unrivalled standardsAdministrationchristopher lumsden of the cayman national Grouphighlights the continuing success of boutiqueadministration in the world’s premier hedge fundjurisdictionwww.hfmweek.com HFMWEEK | 7

caYMaN special report 2007Keeping CaymanIslands in frontAs of March 2007 statisticsAcompiled and updated by theACayman Islands Monetary AAuthority (CIMA) showed a total of8,522 funds under CIMA oversight, themajority of which could be described ashedge funds.Cayman’s hedge fund industryincludes everything from small boutiqueoperations to the larger institutionallybackedfunds, and this diversity is one ofthe jurisdiction’s strengths.The introduction of the MutualFund (Amendment) Law 2006, whichcame into effect last November, furtherenhanced the funds regulatory regimein the Cayman Islands. Changesimplemented included, amongst othermeasures, increasing the minimuminvestment threshold for registeredfunds from US$50,000 to US$100,000and placing greater onus on fundadministrators for the reputationalsoundness of fund promoters and thebusiness of the mutual funds and the offerof equity interests. These can only benefitthe hedge fund industry in Cayman,providing investor comfort – particularlyto institutional investors who are playingan increasingly important part in thehedge fund world.Following successful industry testing,the Cayman Islands’ electronic reportingsystem for all funds licensed, registeredand administered in the jurisdiction wasimplemented on 29 March, enablingfunds’ local auditors to submit annualreturns and audited financial statementsthrough CIMA’s internet portal.E-reporting will help to streamlinethe submission and processing ofinformation on funds as well asproduce aggregate statistical data on thefunds industry.Although the global funds industry hasbeen under increasing scrutiny, CIMAhas worked to preserve the good name offunds registered in Cayman by drafting aset of rules aimed at providing a clearerdistinction between non-public and retailfunds, in line with the recommendationsof the IMF and of a CIMA-industryworking group that reviewed the regimefor funds.These measures are important for theprotection of retail investors but alsoenable the Cayman Islands to preservethe less proscriptive regulatory regimethat the island is rightly famous for andwhich has contributed in no small part tothe jurisdiction’s success as a hedge funddomicile.Cayman’s leading role in the everexpandinghedge fund industry meansthat we always need to keep one stepahead of the growing competition, asother jurisdictions seek to increase theirmarket share.CIMA will continue to monitorthe regulatory regime and our ownprocedures whilst consulting closelywith industry, to ensure that regulationremains relevant and effective and thatbest practice is adhered to throughoutall service areas. Together, regulator andindustry will continue to keep Caymanfirmly at the forefront of the world ofhedge fund domiciles.Yolanda McCoyHead of Investments and Securities,Cayman Islands Monetary AuthorityhFMhedgeFundManagerLondon: Dunstan House,14a st. cross street, london ec1N 8XaTel: +44 (0)20 7269 7575Fax: +44 (0)20 7269 7570New York: c/o channel capital Group,420 lexington avenue, suite 2510, NY 10170Report editor: Gavin BradshawTel: +44 (0)20 7269 6403g.bradshaw@pageantmedia.comProduction editor: Mark BakerTel: +44 (0)20 7269 7594m.baker@pageantmedia.comSub-editor: Melanie rockettTel: +44 (0)20 7269 7594m.rockett@pageantmedia.comOperations director: sebastian timpsonManaging director: charlie KerrAssociate publisher: poppy edwardsTel: +44 (0)20 7269 7585p.edwards@pageantmedia.comPublishing manager: roland spencerTel: +44 (0)20 7269 6404r.spencer@pageantmedia.comSubscriptions and circulation:Duncan MurrayTel: +44 (0)20 7269 7574d.murray@pageantmedia.comHEdgEFuNdMANAgER is publishedmonthly by pageant Media ltd, a certifiedmember of the ppa issN 1748-5894printed by Wyndeham Grange© 2007 all rights reserved. No part of thispublication may be reproduced or usedwithout the prior permission from thepublisherwww.hfmweek.com HFMWEEK | 7

asia-pacific CAYMAN special special report report 2007ADMINISTRATIONPatrick Agemian and Kurt Hagerman of Citco Fund Services on the importance ofindependent administration to hedge fund servicesTrust inindependencePatrick Agemian is themanaging director ofCitco Fund Services(Cayman Islands).Prior to joiningCitco Fund Services(Cayman Islands) in1995, Agemian was anaccountant at Deloittefrom 1989, both inMontreal and theCayman Islands.Kurt Hagerman is theoperations managerof Citco Fund Services(Cayman Islands).Prior to working in theCayman Islands officein progressively seniorpositions, he spent4 years at Citco’sToronto, Canada.Amajor issue has emerged in the hedgefund space in recent years concerning thebasics of fund administration. The importanceof effective third-party administration hasbeen emphasised by the widely-reported collapseof certain large funds that chose to perform theirown valuations or hid real data from the administratorsand auditors.Increased political and media attention,greater regulatory scrutiny and growing interestfrom institutional investors in the hedge space (andtheir attendant focus on corporate governance)have led in turn to increased interest in the rangeof administrative services. It is essential for a hedgefund to be able to demonstrate financial integrityand legal compliance if it is to allay the concerns ofinvestors - and effective administration is crucialin this respect.Principal-agent issuesPart of the growing impetus is driven by fund offunds who, in carrying out their due diligence oninvestment managers of the funds they intend toinvest in, want to satisfy their own corporate governancerequirements as well as those of their major,often institutional, investors. The very base of thisstems from principal-agent issues. These investors(the principals) want to ensure a monitoringof the investment managers (the agents) over theircapital. The history of auditing goes far back onthis topic, but rather than once a year, an administratoris booking and reconciling on a daily ormonthly basis.It is not uncommon for senior figures incorporate administrators to serve on the boards offunds, as sound governance is dependent on theboard having a range of expertise, including anunderstanding of a jurisdiction’s tax and regulatoryrequirements. Some investors or managersmay require that interest. However, institutionalinvestors may be more comfortable with the lack ofconflict represented by a completely independentboard of directors.Valuable serviceRecent years have seen a number of primebrokers offering administrative services to funds.However, investors increasingly like to seeservice providers ‘sticking to their knitting’. Theyfeel that if administration is the core businessand independent from other primary services, theadministrator will be able to make the investmentin both human capital and technology to offer thebest service in terms of value.Unlike bank-owned services, which essentiallycommoditise administration, at Citco we viewindependence as a value proposition. We have beenfocusing on administration as our core businessfor almost 40 years, with no potential conflicts ofinterest, and intend to carry on in this vein.Although there are no ties to a prime broker,Citco is in the position of being able to providecredit lending and bridge financing to fund ofhedge funds through syndication with a numberof banks. We consider our banking, custody andcorporate trust divisions to be complementary to theadministrative offering.As institutional investors demand more lookthroughin terms of what is going on in a fund,independent calculation of management andperformance fees has become increasingly important.It is only natural for investors to expect thatthe administrator ensures calculation of the feesin accordance with the offering documents andinvestment management agreements, or even sideletters that have modified those terms.8 | HFMWEEK www.hfmweek.com

ADMINISTRATION CAYMAN asia-pacific special special report report 2007At Citco, we attach great importance to lookingclosely at the offering documents to make sure thatfinancial personnel at the management companyunderstand the mechanics of how the fund will beadministered. For example, if they plan on usingside pockets for special situation investments, wecan walk through the operational issues and utilisethe combined knowledge of 2,000 staff worldwideto help them understand what options are available.With over 1,500 funds under administration,we have been through the process of setting up afund multiple times and have developed standardsetup checklists to make it as easy as possible.Valuation Policy DocumentCitco administers many of the largest and mostinfluential hedge funds in the sector. Our top100 clients are each in excess of US$1bn in netassets, and the importance of valuations andportfolio pricing grows ever more vital. Third partyadministration will become more defined by theadministrator’s ability in this area. Ask any hedgefund administrator and they will tell you thatvaluation is the hottest topic at present.AIMA’s recently-issued Guide to SoundPractices for Hedge Fund Valuation (co-chaired byour very own Kieran Conroy) is something that allparties to a fund will want to take a close look at. Itis likely that many managers, especially the largerones with institutional money, will want to adoptthe recommendations by putting a more formalValuation Policy Document in place, if they havenot already done this in some format.Citco has been working diligently the lastfew years on our valuation role and havedeveloped a dedicated pricing and valuations groupin New York with additional support in Dublin andSydney. It is important to bring in people whoare conversant with both market pricing issues aswell as the technology side, and this is an area thathas attracted heavy investment. Our pricing teamhas developed their own systems and, through anftp site, are able to bring in thousands of creditdefault swap positions, run them through acceptedmodels and send out prices to fund managers on adaily basis.In addition to the above noted model-drivenpositions, we have had, for a much longer period,a group that consolidated pricing from exchangetraded securities via IDC, Bloomberg, Telekursand others. Then there is also a fund of fundpricing group which gathers over six thousanddifferent hedge fund prices on a regular basis.Outside of the standard exchange traded andmodel-driven instruments, we can also reviewpositions priced at a fair market value. The pricingteam looks at the calculations behind the value orwill examine outsourcing options for private equitytype investments. All pricing activity will continueto be pushed to the forefront with an increase ininstitutional investors as well as FAS157 under USGAAP which comes into effect later this year.Citco has experienced a considerable amountof organic growth through existing fund relationships.However, there is an increasing number oflarge funds turning to independent providers foradministration. Whereas these clients may haveused a smaller or medium-sized administratorbefore, with the advent of multiple prime brokerusage and institutional investors increasing theirasset base, there has been a greater emphasis onsatisfying investor comfort through a top tierindependent service provider.Investors like their investment managers touse an independent name they know and cantrust. Citco is happy to take on these large andexciting new engagements, offering a truly independentservice through our proprietary accountingsystems and pricing/valuations group.C itco has been rated number one in the HFM Weekadministrator survey for the past four years.www.hfmweek.com HFMWEEK | 9

ExpertIndepententMiddle OfficeSolutionsSpectrum Global Fund Administration offers Middle & Back Office Outsourcing andAdministration solutions to Hedge Funds and Fund of Funds. Through our 100% proprietarytechnology platform, Virtual Back Office (VBO), we provide investment managersand their investors seamless access to portfolio, shareholder and financial information.Spectrum is committed to allowing fund managers to focus on their core competenciesby providing accurate and timely services. Through our subsidiary, Spectrum GlobalSolutions (SGS), we also provide compliance consulting services, GAAP financialstatement preparation and operational due diligence services to hedge funds andfund of funds.For more information, please contact us at 646.495.5795 or sgfa@SpectrumGFA.comSPECTRUMGlobal Fund AdministrationChicago | New York | San Francisco | Columbus | Cayman | Bangalore200 N. LaSalle St., Suite 2420 Chicago IL, 60601 sgfa@spectrumGFA.com www.spectrumGFA.com 1.646.495.5795

asia-pacific DIRECTORSHIP/MANAGEMENt special report CAYMAN special report 2007Paul Harris traces the history of International Management Services Limited and its rolein the Cayman Islands fund industryIndependent directorservices pioneerThe history of International ManagementServices Ltd (IMS) in many ways parallelsthe history of the financial industry ofthe Cayman Islands. IMS has been providing professionaldirectors to companies for over 30 yearsand formed one of the first mutual funds operatingfrom the Cayman Islands almost a quarter ofa century ago.At that time the Cayman Islands closely followedUK practice which was regulated by theUK Companies Act of 1955, disallowing companiesfrom holding their own shares. Mutual fundsas we know them today were not able to be registeredas companies in the Cayman Islands untilthe UK Companies Act of 1993 repealed this requirement.Until that time collective investmentvehicles registered in the Cayman Islands hadto be formed as unit trusts or in a limited way ascompanies using redeemable preference shares.Alternative form of investmentIn 1982, deposit interest rates dropped dramaticallyfrom the previously prevailing 20% high,and in order to serve its clients who were lookingfor alternative means of investment, IMSdecided the best course was to form a collectiveinvestment vehicle to invest in US equity funds toachieve maximum capital growth and spread risk.It was probably the first fund of funds to operatefrom the Cayman Islands.To provide a vehicle that its clients couldmore easily recognise, IMS formed IMS CapitalGrowth Investment Corporation S.A., in Panama,where companies were already permitted tobuy back their own shares. IMS then registeredtheir Panama company in the Cayman Islands asa foreign corporation, which enabled it to legallyoperate as a mutual fund from the CaymanIslands. IMS Capital Growth S.A., which is availableonly to corporate clients and staff of IMS, is stilloperating today and share values show almost a500% increase from the original issue date.Providing an independent serviceBut IMS, being a seasoned third party financialservice provider, continued to concentrate onproviding independent financial services to corporateclients and with the explosive growth ofthe hedge fund industry in Cayman IMS came tospecialise in providing corporate governance tothird party funds through the provision of professionallyqualified and experienced fund directorsusing the organisational structure of IMS as aplatform from which to operate. It is by using thistype of innovative solution to client needs thatIMS is able to supply real value added services toits many clients.Most funds in the Cayman Islands require residentdirectors who are independent not only fromthe investment manager but also from other serviceproviders to the fund such as the administrator,lawyer, banker and custodian. IMS can providethese since it is not only independent of themanager but it is also always independent of thefund administrator and other service providers.The residence of the directors in the CaymanIslands also provides the fund with credibility ofdomicile which can be important both from a taxpoint of view and a regulatory point of view.In order to provide the best possible service toits clients, IMS has recruited professionally qualifiedand experienced staff all previously employedby well known names in the industry. IMS’s presentstaff has been drawn from such firms includingErnst and Young, Deloitte, Fortis, UBS, DresdnerFund Administration, Kleinwort Benson,Paul Harris isa Fellow of theInstitute of CharteredAccountants inEngland and Wales,a notary public forthe Cayman Islandsand Chairmanof InternationalManagement ServicesLimited.www.hfmweek.com HFMWEEK | 11

CAYMAN special report 2007asia-pacific DIRECTORSHIP/MANAGEMENTspecial reportPrice Waterhouse, Scotia Bank, Deutsche Bank,DPM Mellon, KPMG and Royal Bank of Canada.Directors provided by IMS are also kept up to datewith matters affecting their work by attendance atindustry specific conferences and seminars.Although IMS has held a fund administrator’slicence for many years, it does not form oradminister funds other than its own in-housefund, preferring to avoid conflicts with clientsfor whom it provides director services, but it canprovide a complete turnkey service if required byindependently working as a hub with third party lawfirms, accounting firms, fund administrators andcustodians.IMS also holds a full trust licence issued by theCayman Islands government in order to be able toprovide trustee services for purpose trusts whichare sometimes used to own the management sharesof certain funds or to take ownership of a variety ofspecial purpose vehicles.The fund administrator’s licence issued to IMSby the Cayman Islands government specificallyauthorises it to provide directors or ‘operators’ toCayman registered funds.Under the licence, IMS maintains a minimumnet worth of half a million US dollars and its ownfinancial statements are audited by governmentapprovedauditors and submitted to the MonetaryAuthority annually. The Monetary Authority’sfund administrators’ inspection team also inspectsits operations periodically, which is somethingworth bearing in mind when choosing someone tolook after your affairs. There are not many firmsin the Cayman Islands who provide director servicesthat have been around very long and are sorigorously regulated or have the organisationalability to provide the required back up to thedirectors when needed.Meeting challenges head onOne of the greatest challenges that faced IMSoccurred in September 2004 when Hurricane Ivandecimated the islands to an extent unprecedentedin recorded history with 200-mile-per hour windsand island-wide flooding from the storm surgecausing loss of all power, communications andutilities. IMS met this challenge head on. With halfof its senior staff off island and half of them on theisland, client’s affairs continued to be adequatelyattended to throughout the emergency period bythe use of portable data backup, mobile communicationsequipment and, by no means least, thedetermination of its staff and management thatthey would continue to provide a first class serviceto its fund clients and that the reputation of IMSwould remain unblemished no matter what theconditions. Drawing on this experience, IMS hasfurther strengthened its disaster recovery ability byarranging for secure emergency alternative operations,if needed, both on and off the island and hasstreamlined the accessibility of secure electronicdata and arranged for its own in-house satellitecommunications system in the event of failure ofthe islands’ telephone facilities.Such a solid history and range of experiencemeans that IMS can provide innovative butreliable services. Having specialised in providingdirectors to hedge funds for many years, IMSknows just what its clients are looking for in aprofessional hedge fund director. Speed, accessibility,initiative and efficiency come immediately tomind – and so does cost effectiveness. IMS is awareof these requirements and anticipates them.For example, a client’s call or enquiry will alwaysreceive immediate attention even if the fund directorhimself is temporarily unavailable to take thecall. IMS staff has been dealing with regulatorymatters applicable to funds for many years andtakes the initiative and the responsibility for seeingthat all required returns, accounts, governmentfees are up to date.Naturally, having been around for such a longtime, the names of IMS clients and business introducersinevitably read like a ‘who’s who’ of the bestnames in the world’s hedge fund industry. Nevertheless,IMS is still willing to listen to small butpromising start ups with good credentials, becauseIMS knows, from its own history and that of theCayman Islands, that “from little acorns mightyoak trees grow.”12 | HFMWEEK www.hfmweek.com

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asia-pacific CAYMAN special special report report 2007ADMINISTRATionPeter Young, of BISYS Hedge Fund Services examines the fundamentals of hedge fundportfolio valuationHedge fund valuationPeter Young isan executive vicepresident andprincipal operatingofficer of BISYSHedge Fund Services(Cayman) Limited.Prior to joining BISYS,Mr Young was themanaging partner andCEO of Rothstein Kass& Company’s CaymanIslands office.With the growth of the hedge fundindustry over the past several years,and the introduction of investorcapital in the industry moving towards the US$2trnmark, hedge funds have surely given an indicationof their role in the global financial market place.This level of growth has, even more so in recentyears, brought scrutiny to the process of hedgefund valuation. The US Securities and ExchangeCommission (SEC), has in recent times broughtactions against fund managers on issues relatingto their approach in the valuation of their portfolioassets. Much could be said in this regard, but thoseof us who are familiar with the industry, are wellaware of the scrutiny by regulatory bodies in thevaluation of investment portfolios.As with any growing industry, hedge funds dohave their challenges and risks. Important amongthese is the difficulty of valuing various types ofcomplex and illiquid instruments. In addition,the structure of many hedge fund strategies isinherently difficult to value due to the varied typesof instruments and the underlying factors thataffect their value. Regardless of how complicateda portfolio structure is or the compositeinstruments within a portfolio are, the hedge fundmust seek to ensure that the financial instrumentsare appropriately valued and, in particular, thatthose values will not disenfranchise investors.Valuing the portfolio‘Principles for the Valuation of Hedge Fund Portfolio’,issued by the Technical Committee of the InternationalOrganization of Securities Commissionsissued nine principles for portfolio valuation:1. Comprehensive, documented policies andprocedures should be established for thevaluation of financial instruments held oremployed by a hedge fund;2. The policies should identify the methodologiesthat will be used for valuing the financial instrumentsheld or employed by the hedge fund;3. The financial instruments held or employed byhedge funds should be consistently valued to thepolicies and procedures;4. The policies and procedures should be reviewedperiodically to seek to ensure their continuedappropriateness;5. The governing body should seek to ensure thatan appropriately high level of independenceis brought to bear in the application of thepolicies and procedures and whenever they arereviewed;6. The policies should seek to ensure that anappropriate level of independent review isundertaken of the individual values that aregenerated by the policies and procedures and inparticular of any valuation that is influenced bythe manager;7. A hedge fund’s policies and procedures shoulddescribe the process for handling and documentingprice overrides, including the review ofthe price overrides by an independent party;8. The governing body should conduct initial andperiodic due diligence on third parties that areappointed to perform valuation services;9. The arrangements in place for the valuation ofthe hedge fund’s investment portfolio should betransparent to investors.Fair market valueWhile the aforementioned principles providea framework for valuing investment portfolios,the recognition of ‘fair market value’ remains asignificant aspect of the objectives in the fundamentalsof hedge fund valuation. The investmentact of 1940 requires that all assets be marked tomarket daily and that current market prices mustbe used, unless they are unavailable, in whichcase ‘fair value’ must be used. Generally AcceptedAccounting Principles (GAAP) defines ‘fair value’as the amount at which the investment couldbe exchanged in a current transaction betweenwilling parties, other than a forced or liquidationsale. With this being a central role in how portfoliosare valued, hedge funds must realize that investorsand potential investors alike will seek the assurancethat the fundamental principles of valuing aportfolio is observed at all times since this processsignificantly impacts the calculation of net assets14 | HFMWEEK www.hfmweek.com

ADMINISTRATioN CAYMAN asia-pacific special special report report 2007value (NAV), performance reporting, fees paid andrisk assessment, to name a few.Following procedureWhile the approach in valuing a portfolio couldvary among different funds, the application of theprinciples of valuing a portfolio remains the samein most cases. A prudent investor in a fund willwant to assure themselves that certain processesare in place to ensure proper valuation. Theseprocedures should include written policies as tohow the fund’s portfolio will be valued and themechanisms that will be in place to ensure thatthese policies are followed; in fact, the valuationpolicy should be in the form of a written documentand reviewed periodically. This should be doneprior to the launch of the fund and approved by theboard of directors. The document should establishwho the responsible parties are throughout thevaluation process and how prices will be obtainedfor the instruments to be valued, in addition tohow any variations should be reported throughoutthe management chain.As with most financial processes, propercontrols must be in place in terms of how the variousduties to be performed in the valuation processare segregated to avoid conflict of interest. In mostcases, this is achieved by allowing the fund administratorto value the portfolio and prepare the NAVor a third party valuation service provider, evenif the fund manager, for their own internal purposes,conducts a similar exercise. However, theissue of pricing illiquid securities and other hardto-priceinstruments remain a challenge, and assuch, in most cases, the board of directors remainresponsible for the valuation process, including theresolution of these issues.Demand for transparencyThe sophistication of most individual andcorporate investors in hedge funds has increasedthe growing demand for transparency as part ofgood governance, and with this being the case,most if not all offering documents, will clearlystate who the administrator of the fund is or the responsibleservice provider in valuing the portfolio.To ensure independence and transparency, NAVreports should be sent to investors directly fromthe administrator or any other third party serviceprovider valuing the portfolio.In general, the valuation process should, at theleast:1. Insure the segregation of duties between fundmanager/investment advisor and the partyresponsible for valuing the portfolio;2. In circumstances where there are illiquidsecurities or hard-to-price instruments, theinvestment management along with theboard of directors should provide supportinginformation whenever they are asked to provideprices on these instruments;3. The procedures established in the fundvaluation document should be ones that can befollowed and are practical, in that the serviceprovider valuing the portfolio can implementthem, and can be consistently applied;4. Provide for at least two pricing sources withprocedures for addressing variance betweenpricing sources;5. Provide for the proper verification of anypricing models established by the board ofdirectors and the fund manager, and should betested by the administrator or the responsibleparty valuing the portfolio;As with any systems, policies and procedures,periodic assessments must be carried out to ensuretheir effectiveness. The process of portfolio valuationis no different, as any deficiencies in the processcould result in bad valuation and significantproblems for the fund, and the governing body thathas a fiduciary responsibility to provide accurateand appropriate valuations.www.hfmweek.com HFMWEEK | 15

asia-pacific CAYMAN special special report report 2007ADMINISTRATionDarren Stainrod, head of Fund Services for UBS Global Asset Management in Cayman,examines Cayman’s strength in the face of changes in global regulation and serviceprovision in competing jurisdictionsStepping up tothe challengeDarren Stainrod isan executive directorand head of UBSFund Services inCayman. He hasresponsibility for theoverall managementand development ofthe Fund Servicesbusiness in theCayman Islands and isa member of the FundServices ManagementBoard.The global funds industry felt the impact ofincreased SEC scrutiny in 2006 after the2005 regulatory requirement for registeringof funds’ advisors began to take effect. Whilefunds and managers are exempted from SEC registrationunder certain circumstances such as havinglock-ups of two years or more, the overall effecthas nonetheless been a drain of liquidity from themarket.This registration requirement was later revokedbut by that point, many fund managers hadalready taken steps to become registered and veryfew subsequently deregistered. The impact of thiswas twofold:1. The change in the liquidity terms of funds, whichhas had a huge impact on funds of funds and theattractiveness of hedge funds in general.2. The funds themselves had to go through dramaticchanges in terms of the infrastructureneeded to run a fund, for example, the need fora compliance officer and, in some cases, a teamof compliance people.Barriers to overcomeIn comparison to 10 years ago, the barriers to entryhave increased significantly. Whereas managerswith a couple of million dollars and a lot ofgood ideas could come into the hedge space andget a fund started without having to commit toomuch of their own money, nowadays it’s almostimpossible to set up a profitable fund with underUS$20m and probably nearer US$50m of assetsunder management.This is a global trend of course, but has beenparticularly felt in the US, relating as it does to thenumber of US investors.There are several reasons for the increased costs.If you are hoping to attract institutional moneythen the expectation is that you will have a thirdparty administrator, an annual audit and a compliancedepartment. The reality is that you are notgoing to attract the money unless you can tick allof these boxes.If you only have, for example, US$2m to startwith, you need to make a 10%–20% return just tocover your fixed costs.Government open for feedbackRegulatory changes in Cayman in 2006 includedan amendment to the mutual funds law, raisingthe minimum investment from US$50,000 toUS$100,000.This had little impact as the majority of fundsalready have minimum investments averagingaround US$500,000. The Cayman governmenthas always proven open to feedback and is committedto making sensible regulation. When legislationis drafted that does not sit well with theindustry and could make it less competitive forCayman on a global basis, the government andregulator are open to dialogue and receptive to industryconcerns.Historically, hedge funds have always been popularwith the high-net-worth investors but institutionalmoney is clearly where the rapid growth hasbeen in the last couple of years. With this increasein institutional investment comes an ever-increasingdesire for greater due diligence and corporategovernance in general. To date, Cayman as ajurisdiction has preserved a sensible balance inthis respect so there has not been a need for anysweeping regulatory change.16 | HFMWEEK www.hfmweek.com

ADMINISTRATioN CAYMAN asia-pacific special special report report 2007The legal environment has likewise remainedfairly constant, with little extra reporting abovethe existing requirement for regulated funds to filetheir annual financial statements. The introductionof e-reporting applied largely to individualfunds reporting on an annual basis and serves toprovide a better assessment of the size and complexionof the industry, rather than to probe anydeeper into the underlying positions of funds.Increasing informationFrom a business perspective there is a dailyincrease in the information that is required,much of it being directly provided by the managersthemselves. Increasingly, however, the largeinstitutional investors want to see that informationvalidated by a third party and often it comes backto the administrator to provide sign-off.The Cayman government clearly does not wantto legislate in a way that will be detrimental toattracting funds to Cayman. The existing rules areabout protecting investors and at the same timeprotecting funds.There are various jurisdictions that are tryingto provide an equivalent product – particularlythe Channel Islands, Luxembourg and Bermuda.All of these have tried to match the 24-hour turnaroundfor establishing an entity that is offered byCayman and will probably achieve this over a sixto 12 month period. What they may be less likelyto match is the infrastructure and the mindset ofthe service providers – the lawyers, the administratorsand the accountants. Cayman has first moveradvantage in that respect.Probably the biggest barrier to mimicking Cayman’soffering is flexibility. Other jurisdictions maybe able to achieve the one-day setup but will theyallow their managers to follow any strategy anddo they allow administration and auditing to beundertaken in other jurisdictions? All of the abovejurisdictions have historically insisted on serviceproviders being within the same location, whereasCayman has a much more flexible model – you candomicile in Cayman but essentially your fund canbe serviced anywhere in the world.Global reputationThe role of UBS in maintaining Cayman’s preeminenceis clear. Fund administration is really apeople business. Our global name and reputationattracts both clients and employees and we work tomaintain this reputation by having a strong clientfocusedbusiness model. We have far more qualifiedstaff than our major competitors and operatea single point of contact with our clients – they arenot passed from person to person, rather they dealwith a qualified professional account officer on allaspects of their funds. We also work on the responsivenessof staff and seek feedback from clients.Coupled with this, UBS also has Fund Servicesoffices in Canada, Ireland, Luxembourg, Switzerlandand the UK, so we are able to service clientsacross all time zones, with capabilities extendingfrom traditional funds to alternative assets andother collective investments.What differentiates UBS is our ability to providean integrated, comprehensive service. Throughour client-focused, single point of contact approachcoupled with state of the art technology, we canoffer all elements of service to clients, growingand developing with them, to deliver successfulpartnerships.www.hfmweek.com HFMWEEK | 17

CIBC Fund Administration ServicesFund accountingShare registry and transfer agencyTrustee servicesCustodyThere are only a few stars in the fundadministration business. We are proud to berecognized by Global Custodian Magazineas one of them.For more information please contact:Arin SmithManager, Business DevelopmentDirect Line: (345) 914 9429arin.smith@wi.cibc.comMartin LaidlawDirectorDirect Line: (345) 914 9452martin.laidlaw@wi.cibc.comCIBC Bank and Trust Company (Cayman) LimitedWe are regulated in the conduct of our Fund Administration Services business by the Cayman Islands Monetary Authority.

Auditing/AcCountancy CAYMAN asia-pacific special special report report 2007Look before you leapGeoff Varga and Nick Matthews of Kinetic Partners emphasise the importance of duediligence in the hedge fund spaceOne would think that with investorsdefined as ‘sophisticated’, and the magnitudeof the sums being invested, rigorousdue diligence on both the underlying investmentand the parties involved would be standard protocol.Surprisingly, many investors and advisersregularly place blind bets based solely on word ofmouth, herd mentality, profit-chasing or unverifiedinformation/references which in some instancesturn out to be unreliable or even outright fraudulent.Not so surprisingly, such investors are thenshocked when the investment terms or the fund’sreturns do not match the advice given when theinvestment was made.You do not have to go far these days in the newsto find situations such as the Bayou Group withits fictitious audit firm, Philadelphia AlternativeAsset Management with its undisclosed brokerageaccounts or Refco with its altered records. Mostrecently Amaranth now faces claims of misrepresentationover its purported investment strategy;claims that may have been avoided if proper initialand ongoing due diligence had been undertaken bythe investors and their investment advisers.When things do go wrong, post-mortem ‘duediligence’ procedure becomes standard practice asforensic accountants, insolvency practitioners and/or lawyers review the current and past affairs ofthe fund to determine what happened, who may beresponsible and whether actions should be takenagainst those responsible in an attempt to recovermonies for those that were wronged. In many ofthese situations, the complexity of the fund itself,notwithstanding the possible presence of fraud,creates a myriad of issues among the partiesinvolved. Something viewed as a relatively simpleportfolio mispricing can quickly become complex,with carry-over effects especially where investorscame and left at NAV prices which are now knownto be incorrect. More generally, even for those notdirectly involved, lessons can be learned by thewider investment community.In addition to proper due diligence becomingstandard practice for the investor or its advisers,fund managers themselves should also be preparedto provide the required information to investors,both as part of the sales process and in retaininginvestors. Fund managers should, therefore,understand the rationale behind the process so asto meet investors’ due diligence expectations in anefficient and effective manner.Although it is difficult to build a complete duediligence checklist that will both ask all of the necessaryquestions and provide the answers to investors,there are certain key factors that should beconsidered and reviewed as part of any investmentdue diligence. These include (in no particularorder of importance) the following points:i) Fees/compensationAn understanding of the basis of remunerationshould be important to the investor, as it is usuallya direct indicator of peoples’ motivations. Managers,for example, typically charge the standard2 and 20, focusing them not only on assets undermanagement but also on generating significantprofits. In some cases, this mindset can be somewhatcounter-productive, as managers take unnecessaryrisks in pursuit of the big win.ii) LeverageLeverage is often said to be one of the best advantagesof hedge funds as it allows them to boostreturns through increased size. This can go theother way, however, if a fund gets over-leveragedand cannot produce returns sufficient to coverborrowing costs or, more importantly, risks margincalls, precipitating a forced liquidation of the fund’sassets and impacting their underlying values.iii) Liquidity/lock-up provisionsConsideration should be given to the ability toredeem money out of an investment, as it is justas important to know ‘how to get out’ as it is toknow how to participate. Driving factors in sucha decision may include the investor’s reaction to afund’s performance, a change in investment strategyof the investor, or market influences generally.In considering such factors, investors shouldalso consider the bigger picture and the positionsGeoff Vargaspecialisesin insolvency,restructuring andrecovery services.With over 12 years’experience gained ina Big 4 environment,Geoff leads theCorporate Recoveryand Forensic practicein the Cayman Islands.He is a licensedinsolvency practitionerand has worked onlarge, internationalinsolvencyengagements duringhis tenures in theCayman Islands,Canada and NewZealand.Nick Matthews has10 years’ experience inforensic accounting,gained at a Big 4firm while working inthe UK and the US.Utilising multinationalteams, he has ledmajor investigation,anti-money launderingand litigation projects.www.hfmweek.com HFMWEEK | 19

asia-pacific CAYMAN special special report report 2007Auditing/AcCountancyof other investors, as a rush for the exitcan, and usually does, trigger gateswhich impede redemptions. Similarly,with the increased presence of privateequity investments and other illiquid orlonger term investments, the ability ofthe fund to meet above average redemptionrequests may also be hampered.iv) Material agreements/side pockets/sidelettersNotwithstanding the offering documentitself, most funds have a relativelylimited number of key agreements thatshould also be reviewed to the sameextent as the OM. These would includethe fund’s brokerage agreement, administrationagreement and managementagreement, each of which should clearlyidentify the roles and responsibilities ofeach party. In addition to these ‘known’agreements, investors should also inquirewhether any other material agreementsexist, including side pockets andside letters, that may affect their position/performancein the fund, ability toredeem or ranking with other investors.v) References/track recordAlthough the old adage is that historyrepeats itself, this alone is not a goodbasis for investment decisions. Simple,thorough background checks should beundertaken of the various parties andtheir key staff to ensure that investorsknow the people and entities they aredealing with, and that their credentialsare genuine.vi) Regulatory complianceEven the most well thought out investmentstrategy cannot get off the groundor continue to function if the fund andrelated parties do not adhere to the everincreasing regulatory regime to whichthe sector is subject. In some instances,entities manage their own compliancearrangements, while others bring inspecialists.Regardless of the method, it isimportant that reviews are undertaken toensure that the fund is compliant ineach relevant jurisdiction and that italso follows more global standards onmatters such as anti-money launderingchecks.vii) Service providersGenerally speaking, quality fundsengage quality service providers. Thisapproach provides benefits to the fundon two levels: (i) comfort to the investorthat reputable entities are assistingin the management of the business,and (ii) as a positive selling tool to themanager in providing the investor suchcomfort. In some circumstances, managerswill take certain functions, suchas administration and/or brokerage,in-house or place them with related parties,to achieve cost savings. Althoughthis may make financial sense, it shouldbe weighed against segregation andindependence issues which, from a riskperspective, can outweigh the savings.viii) StrategyIn addition to taking account of thepracticalities of the fund’s operationsand terms, investors should ensurethat they understand how the fund willmake money. They should satisfy themselvesthat the strategy is credible andconsistent with the anticipated returns.The saying that, “if it looks too good tobe true, then it probably is” also appliesto investment strategies and investorsneed to ensure that their return expectationsare reasonable having regard tomarket condition. The strategy shouldalso be consistent with the investor’srequirements, taking account of factorssuch as portfolio diversity and risktolerance.ix) ValuationValuation is likely the biggest driverfor all interested parties in fund investment.It forms the basis of determiningthe returns for the investor, and the feesearned by the manager. It is also used inthe remuneration of certain service providers.Consequently, it is imperativethat investors fully understand the basisof valuation of the portfolio, who will becalculating the valuation and whetherindependent checks and balances arein place to verify the results. Complicatingthis further, however, is the extremecomplexity of certain financial instruments,such as derivatives, CDOs andswaps, which even to the most sophisticatedinvestor can be difficult to understand,let alone value.The list above is not exhaustive, andthe level of detail to which aspects ofthe investment process may be reviewedand/or scrutinised will vary based onboth the investor and/or the underlyinginvestment. Furthermore, when we nowtalk of ‘investors’, we no longer speakonly of the high-net-worth individualwith whom the concept of hedge fundswas born, but now must consider institutionalinvestors, family offices, privatetrusts, pension funds and even fund offunds, each of which have their owndistinct level of investment knowledgeand expectations as regards to risk andhence due diligence requirements.Although there are no sure investmentsand no guaranteed marketindicators, robust due diligence bothon an initial and ongoing basis are acritical step if investors are to be fullyinformed and maintain some controlin the investment process. In buildinga reliable due diligence programmethere are many published laundry listsof standard questions and informationrequests upon which to build. Whererefinement may be needed, however, isin applying such tools to gain a genuineunderstanding of all risks associatedwith the investment. In this regard,and given the diverse nature of the duediligence process and complexities containedwithin, investors should considerthe use of specialist financial, regulatoryor legal assistance as necessary toachieve their objectives.20 | HFMWEEK www.hfmweek.com

Looking for anindependent director?■ We have been providing directors to Cayman Islands companies for over 30 yearsand are specifically licensed by the Cayman Islands Government to provide directorsor operators to Cayman Islands mutual funds.■ We are required by Government to maintain a minimum net worth of half-a-milliondollars, file annual audited accounts and are subject to periodic on-site inspection fromthe Cayman Islands Monetary Authority.■ The directors we supply are professionally qualified, drawn from household names inthe fund industry and backed up by the full resources of IMS.Certainly worth thinking about when choosing someone to sit on your boardInternational Management Services LtdPhone: 345 949 4244, Email: info@ims.kywww.imsfundservices.com

asia-pacific CAYMAN special special report report 2007AUDITING/ACCOUNTANCYJoel Dodson of KPMG outlines financial statement preparation for hedge fundsA fully informeddecisionAs the hedge fund industry becomes moremainstream, hedge funds and theirinvestment managers are now facingincreased scrutiny from groups such as the SECand FSA.This enhanced oversight has created a wholenew set of issues that investment managers need towith the SEC, the preparation of the year-endfinancial statements by the auditors will be a specificallyprohibited, ‘non-audit service’ subsequentto June 30 2007 (source: Securities and ExchangeCommission, Investment Advisers Act of 1940Section 206(4) and Rule 206(4)-2, Response ofthe Office of the Chief Accountant Division ofJoel Dodson isresponsible forKPMG’s AccountingAdvisory Servicesgroup, which providesfinancial statementcompilation andaccounting advisoryservices to offshoreand domestic hedgefunds.address, including the preparation of their fund’sannual financial statements.Historically, auditors have often drafted theirclient’s financial statements in conjunction withtheir year-end audit. In today’s environment, forfunds where the investment manager is registeredInvestment Management, August 28, 2006).The rationale for this is two-fold1) When auditors help prepare the financial statementsfor their hedge fund clients, this cancreate a “self-review” threat as there could be22 | HFMWEEK www.hfmweek.com

AUDITING/ACCOUNTANCY CAYMAN asia-pacific special special report report 2007a perception that auditors would be less rigorousin their reviews of the financial statementsthan they would be had they not been involvedin their preparation.2) The financial statements are ultimately the responsibilityof the fund’s management and/ordirectors. This is a fundamental principle underany accounting framework. In the audit scenario,this fact is explicitly stated in the auditors’ engagementletter and management’s representationletter. Therefore, preparing financial statementson behalf of a hedge fund client or evenrecommending accounting policies and disclosurescould be viewed as undertaking a managementfunction, thereby creating a threat to theauditor’s independence. This increased focuson independence is not solely from regulatoryauthorities. Audit firms are under scrutiny fromtheir internal risk management and compliancedepartments.Even though it is the fund manager’s responsibilityto prepare the financial statements, investmentmanagers and fund administrators may not havethe resources to prepare a fully GAAP-compliantset of financial statements and note disclosures.This is not surprising considering that investmentmanagers and administrators are primarilyconcerned with preparing net asset value calculations,performing shareholder services and overseeingthe daily operation of their funds. Financialreporting is a very specialised field and reportingstandards are constantly changing. As a result, it isincreasingly difficult for accountants in industry tostay up-to-date on financial reporting standards inaddition to servicing their clients.Given the sensitivity today surrounding properfinancial reporting, it is critically important thatthe individuals preparing the financial statementshave sufficient knowledge of financial reportingstandards to make informed judgments on thefund’s accounting and disclosure requirements.This sensitivity also highlights the importance thatmanagement be thoroughly involved in their fund’sfinancial reporting process.Under today’s standards, a fund’s auditors canonly advise a client as to what their financial statementdisclosure options are and whether a fund’sfinancial statement disclosure is GAAP-compliantor not. So, what options do fund managers andadministrators have in the preparation of theirfund’s financial statements?One solution is that the fund’s investment manageror administrator prepares the financial statementsthemselves. This has the benefit that thosewho are preparing the financial statements have athorough knowledge of the fund’s operations andthe nature of its risks. However, financial statementpreparation is not the core business of investmentmanagers and fund administrators. Further, thiswould be a significant demand on their resourcesto develop this expertise in-house.An alternative solution is to seek accountingadvice and assistance from an independent thirdparty such as a qualified accounting firm with financialreporting experience. This service is typicallyreferred to as a compilation engagement. Theaccountant compiles financial statements usinginformation provided by management, but offersno level of assurance or comfort on the informationused. Using a qualified third party to preparethe fund’s financial statements and provide adviceon financial reporting is a good way for managementto ensure that the significant accounting anddisclosure requirements are being addressed. Thiswill also be appreciated by the fund’s auditors, asthey will be relieved of any ‘self-review’ threats totheir independence.Ultimately, the decision as to who will preparethe fund’s financial statements is extremely important,regardless of whether the fund is regulatedor not. A properly prepared set of financial statementswill not only result in a more efficient andeffective audit, but should also lead to fewer questionsfrom investors and regulators.www.hfmweek.com HFMWEEK | 23

asia-pacific CAYMAN special special report report 2007ADMINISTRATionCanover Watson, managing director of Admiral Administration in the Cayman Islandsdiscusses the model behind the company’s growth over the past decadeThe place to beCanover Watsonis managingdirector of AdmiralAdministration, havingjoined the companyin 1997. From 1993to 1996 Watson wasemployed by theaccounting firm ofMcGladrey & Pullenin Fort Lauderdale,Florida. He was thenemployed as a senioraccountant at BritishAmerican Bank inGrand Cayman,Cayman Islands.Based in the Cayman Islands, AdmiralAdministration was formed in 1996 toprovide administration services to a familyof offshore mutual funds. Since then the firmhas evolved and grown to service 270 investmentfunds including hedge funds.We spoke to Canover Watson, managing directorat Admiral, to discuss how the small boutiqueadministrator has grown since inception andis now ranked second in the world for ‘OverallExcellence in Fund Administration’ with the AlphaAward in 2006.People firstAdmiral, a small boutique administrator, competeswith the many larger players on the island,such as Goldman Sachs, UBS, Citco and Fortis, forfund administration business. As an independentgroup it has had to differentiate itself from the verybeginning, doing so, through its people.“Our model has always been to hire only qualifiedaccountants. Hence our clients and otherprofessionals we work with are always dealingwith someone at that level, and as a result we canconsistently provide a high level of service,” saidWatson.Through its people, Admiral has built a strongreputation, recognising the differing needs of smalland large clients from its experience over the past10 years. Five to 10 years ago, the administratorwas not in a position to compete directly with thelarge institutionally-backed administrators thatwere well established. Admiral’s clients comprisedthe small start-up managers looking for personalisedattention from their administrator, whichbecame Admiral’s niche.“We kept our minimum fees low, and our assetbasedfees were competitive. The basis of Admiral’sphilosophy is ‘as you grow, we will grow with you’.And that model has worked very well. We have oneclient that started at US$20m, and has since grownto a US$4bn group.” According to Watson, Admiral’sconsistent first-rate service is the main reasonbehind its ability to retain such clients.Think bigThe firm recognises the biggest difference inthe needs of small and mid-sized funds is thatmost large groups have their own infrastructure.“They have a large back-office support withprobably more people than Admiral itself. Itsback-office is well established and there is not toomuch required of us except the basic administrationservices,” he adds.The smaller players, the start-up managers, inmany cases tend to be just the manager and maybeone other staff member. And so they rely heavilyon Admiral as the administrator in back-officeservices, resources and ability to guide themthrough Cayman as an offshore jurisdiction and itsrules and regulations.Admiral ensures fund managers have directcontact with well-informed professional staff.Each client is assigned with a team comprising ateam leader, three to four account managers andan administrative assistant. Admiral prides itselfon establishing relationships between team membersand clients, as if they were part of the samecompany.In the past this fit perfectly with the level ofAdmiral’s staff, catering for the small start-up manager.“The smaller manager is very reliant on us.We have a qualified accountant on the front line asopposed to a junior and that is one of the things thata smaller manager appreciates. We form a closeknit partnership with the client. They would notreceive the same level of service with a largeradministration firm at a competitive fee.”Moving on upTen years later, Admiral has grown to a certainsize; it started with one family of funds and nowadministers 270 funds with total assets underadministration of US$30bn. The administratornow has 80 staff members.Admiral is now looking to attract larger funds asclients according to Watson, its traditional targetmarket being the small manager with US$10m–US$20m in assets. Now with a decade of experience24 | HFMWEEK www.hfmweek.com

ADMINISTRATioN CAYMAN asia-pacific special special report report 2007behind the firm, Admiral is well equipped and hasthe knowledge to service a mix of clients.Watson revealed: “Admiral’s success story wasbased on the 80/20 rule. If you brought on clients,80% of them would do well, but 20% would beoutstanding.” In fact, many of the administrator’sclients went on to become large groups. “But thereality for us now, with 270 clients, is we can’tcontinue to grow with the start-up managers.”Admiral is now encountering some of the sameissues that many of the larger players are runninginto regarding resource management andhow to continue to grow its business and make itsustainable. “We have to scrutinise how we manageresources and what type of clients we can actuallytake on and monitor the profitability of existingrelationships due to capacity constraints”.The firm is trying to resolve the capacityconstraint issue by building its infrastructure. Itsoperation is considerably more robust now. “We’restill not a large bank but we do have 10 years stellarreputation.”Admiral positions itself as an alternative to thelarge groups for the small manager. All clientsreceive the same level of service regardless of size.“No one gets lost; everyone gets the same level ofservice which has manifested itself in a high clientretention rate. It is especially satisfying for us aswe are successful in retaining clients as they havegrown to become very large funds,” he added.Admiral’s focus on people is aligned with itssignificant investment in its systems. Towardsthe end of last year Admiral implemented AdventGeneva and recently invested in an industry leadingweb reporting solution. “These investments havegiven us the operational capability to compete moredirectly with our larger competitors.”Admiral’s business comes primarily throughreferrals from clients and other professionals inCayman and the US. Relationships are very important,says Watson, and the firm does not want toforget its model based on the strength of its people.The firm is moving closer to competing withthe larger banks in that respect, and received theAlpha Award for ‘Overall Excellence in Fund Administration’in September last year.Although Goldman Sachs was ranked first,Admiral came in second, beating Morgan Stanleywho came in third. Furthermore, Watson, personally,was awarded the ‘Young Caymanian LeadershipAward’ in February this year marking hisdedication to Cayman’s community.Moving on outAt present Admiral is in the process of setting up aDublin office which should be up and running by1 June 2007.“Our primary source of business has been theUS, our initial target market. Now as we look atopportunities we see Dublin, Ireland as a hub intothe European market,” said Watson.Admiral does not serve many clients in Europeand the administrator sees great opportunities inbeing located there. “Through this development,we will be able to tap into European and the Asianmarkets.”Revealing the firm’s long term objective, Watsonadds that Admiral may possibly open an office inAsia in December 2008.“It is more than likely we will open a new officein Singapore. However that is still in the earlyinfancy stage and we have only started to researchthe prospect.”Admiral is also considering the possibility of anoffice in Dubai. But as Watson concludes: “Caymanremains our base, and is a great location to be in.As the jurisdiction of choice for the US market,there is no better place to be right now.”www.hfmweek.com HFMWEEK | 25

Auditing/AcCountancy CAYMAN asia-pacific special special report report 2007On the road torecoveryKenneth M. Krys of RSM Cayman Islands, examines the insolvency practitioner’s roleCayman’s insolvency structure is based onUnited Kingdom common law and legalprecedent. With complex internationalengagements like Bank of Credit and CommerceInternational (BCCI), and more recently, BeaconHill and Philadelphia Alternative Asset Management,the Grand Court of the Cayman Islands hasshown it can make sound decisions that are wellrespected on a global basis, while allowing for flexibilityand practicality in addressing complex issues.Outside of the court, there are over 30 law firms and12 accounting firms on the island, with a numberof the larger firms having extremely competent andexperienced litigation/insolvency departments.Insolvency practitioners (IPs) are normallyinvolved in engagements in two ways. First, the Caymanregulators have power to appoint a controlleror liquidator over an entity that is in breach of theregulatory laws. Second, local attorneys, instructedby creditors or investors, will seek to appoint aprovisional or official liquidator to assume controlof a Cayman entity and investigate its affairs.Many options availableDepending on what is intended, there may be anumber of options available other than placing aCayman entity into official liquidation. One optionis to restructure the fund, either changing its directorsor service providers. Another may be simply towind up the fund voluntarily, repay the investors,and dissolve the fund.Where there are concerns with fraud, a thirdoption may be provisional liquidation, whichallows an IP to assume control of the assets and investigatewithout necessarily realising those assetsand distributing them to creditors and investors.This can be done where there are concerns withthe mind and management of the entity but thereis still a legitimate business or line of business thatcan be hived off and sold at a value.Another possibility, that we see being considered,is the appointment of an inspector. This givesauthority for an IP to investigate an aspect of thebusiness without assuming control. This avoids theadverse impact that a liquidation appointmentmay have on the value of an entity.Maximise recoveriesLiquidators, regulators and the judiciary all havea common interest in dealing with failed institutions,which is to maximize the recoveries anddistribute them as quickly as possible. This commoninterest has traditionally involved a goodrelationship and healthy rapport between thelegal community, the regulatory watchdogs, and theinsolvency practitioners, and I expect the collaborationbetween these groups to continue.Recently, the Grand Court decided that theliquidators of a Cayman Islands fund should beCayman Islands practitioners, ruling on the fundamentallegal principle that when a companyis incorporated in the Cayman Islands, CaymanIslands law will apply to its liquidation and thebest person to wind up the fund would be aCayman Islands practitioner.This is not to say, however, that the CaymanCourts have no flexibility. In certain cases, theCourts have in the past granted joint appointmentsbetween a Cayman Islands practitioner and a foreignliquidator. The judge in the matter also addedthat investors had a reasonable and legitimateexpectation that such a winding up would occur inthe Cayman Islands under Cayman Islands law.There are a number of other reasons that acreditor or investor may consider in appointinga Cayman IP. One important aspect is the optionand flexibility it avails a liquidator in relationto recovery actions, discovery, and dealingwith creditors and investors. The Cayman IP candetermine whether the Cayman Islands, oranother jurisdiction, would provide the best forumto pursue a particular party to recover assets orobtain information. This in turn maximizes thebenefit to stake-holders.Kenneth Krys ismanaging partner ofRSM Cayman Islandswhich established itsCorporate AdvisoryServices groupin 2004. Krys is achartered accountant,chartered financialanalyst, certified fraudexaminer, certifiedanti-money launderingspecialist andchartered businessvaluator.Joanna Chong issenior manager,Corporate Recovery,at RSM CaymanIslands. Ms Chonghas over 10 yearsexperience working inthe financial servicessector, nine of those inthe field of regulatorycompliance and fraudinvestigations.www.hfmweek.com HFMWEEK | 27

asia-pacific CAYMAN special special report report 2007Auditing/AcCountancyOnce a liquidator is appointed, thereare several ways investors can getinvolved or be kept up to date on events:– direct participation in the creditorsor liquidation committee. This committeeis consultative and liquidators willdiscuss with them significant aspectsof the liquidation, including the timingand appropriateness of pursuingrecovery actions.– timely reports prepared and distributedby the IP.– via a website, which in my experience,has proved to be an efficient vehiclefor communicating with investors andcreditors and keeping them updated onwhat is happening in the liquidation.International liquidationsMost Cayman liquidations are bynature international and therefore whathappens elsewhere, particularly froman insolvency point of view, affects us. Arecent change that has impacted IPs inCayman has been the implementationby countries like the US and the UKto adopt UNCITRAL models in theirbankruptcy/insolvency legislation. Myexperience with this issue on the SPhinXengagement and in particular the Chapter15 decision, is that it has posed newand interesting problems for the insolvencypractitioner in pursuing recognitionas foreign main proceedings.Also, with the growth in the emergingmarkets, and the development of theinsolvency legislation in some of thesemarkets, I think it is likely that CaymanIPs will face these issues more often.Chapter 15 of the US Bankruptcy Lawis relatively new, and this topic is still attractinginterest. The purpose of Chapter15, and the Model Law on which itis based, is to provide effective mechanismsfor dealing with cross-border insolvencycases involving funds, assets,claimants and other parties in interestinvolving more than one country. Generally,a Chapter 15 case is ancillary to aprimary proceeding brought in anothercountry, typically the debtor’s homecountry. An ancillary case is commencedunder Chapter 15 by a ‘foreign representative’filing a petition for recognitionof a ‘foreign proceeding’. Through therecognition process, Chapter 15 operatesas the principal door of a foreignrepresentative to the federal and statecourts of the US.I recently sought such recognition inrelation to my role as court-supervisedliquidators of the SPhinX Funds. In thiscase, notice was given to certain partieswho were involved in a settlementinvolving the SPhinX Funds and Refcoand they filed a joint objection to therecognition of the Cayman proceedingsas foreign main proceedings. This wasthe first time an application for recognitionunder Chapter 15 was challenged.The primary issues in the hearingwere the “centre of main interest”(COMI) and the US Bankruptcy Court’sdiscretion to consider other factors. Andwhile the court appeared to be persuadedon the balance of probabilities thatthe Cayman Islands was COMI, it hadconcerns as to what impact the recognitionas foreign main proceedings mayhave on a related case before the samecourt and determined that the proceedingshould be recognized instead asforeign non-main, thereby giving theliquidators none of the deemed reliefafforded under Chapter 15. Not surprisingly,I appealed the decision.Since the SPhinX decision, therehas been justifiable cause for concernamongst Cayman Islands-based IPswith respect to the recognition of Caymanliquidations in the US, followingchanges to the US Bankruptcy Code.Those concerns have since been amelioratedin part, by the decision of theUS Bankruptcy court in the case of AmerindoInternet Growth Fund (in liquidation)on 5 March 2007, which hada stronger connection to Cayman. Thedecision is an important step towardsrestoring the status quo with respectto recognition of Cayman liquidationsas foreign main proceedings under theUS Bankruptcy regime and should goa long way towards reassuring practitionerswho may need to bring similarapplications in the future.28 | HFMWEEK www.hfmweek.com

Auditing/AcCountancy CAYMAN special report 2007In addition, the liquidation of SPhinX is presentingsome interesting and cutting edge issues withregard to winding up Segregated Portfolio Companiesand their respective cells. Given that there isno precedence in how to deal with cellular assets ina liquidation context, we anticipate this issue willbe followed closely by the fund industry.Lastly, the Cayman Islands Government isreviewing draft revisions to the Companies Lawto incorporate the liquidation process, which willprovide further guidance on the liquidator’s rolesand responsibilities.What indications might alert investors thatthere are problems with the fund?This is of course dependent on the specific fundand the fund’s investment objective, but on a moregeneral basis, I would consider the following toraise red flags:1. Inability to contact the directors or investmentmanager, or a failure by them to address questions– this can mean a fraud has been perpetrated,there has been significant losses, or lackof liquidity;2. Delays in issuing or suspensions of NAVs – usuallysuggests valuation issues or significant losses;3. Redemption requests not being met or suspensionsof redemptions – liquidity issues;4. Resignation of the administrator, auditor ordirectors over accounting, valuation or liquidityissues;5. Changes in the offering documents – unsuccessfulstrategy or non-compliance of previousobjectives;6. Litigation – breach of contracts, liquidatingissues, misrepresentation;7. Significant redemptions – insider information,valuation issues.Competence and experienceDespite the widespread publicity the failures ofsome funds have had, in Cayman there has beena relatively small number of major ‘failures’. Thatmeans, in a jurisdiction where it is projected thatin excess of 20,000 funds are registered or established,only a nominal percentage of funds fail.The ability of Cayman insolvency practitionersto deal with fund failures in a timely and costeffective manner demonstrates the competenceand experience of the professionals in this jurisdiction,which in turn has enhanced the attractivenessfor outside investment.Mark McDonald issenior manager,Corporate Recovery,with RSM (BritishVirgin Islands)Limited. Mark hascorporate recoveryexperience in NewZealand, CaymanIslands, London andmore recently in theBritish Virgin Islands.www.hfmweek.com HFMWEEK | 29

asia-pacific CAYMAN special special report report 2007ADMINISTRATIONRon Suber, president of Spectrum Global Fund Administration, and Wayne Ross,director of Spectrum Cayman, discuss the effects of institutional investment onproviders of administration and middle office servicesInvestment influxRon Suber joinedSpectrum GlobalFund Administrationas president in July2006. Prior to joiningSpectrum, Mr. Suberworked at BearStearns from 1992 to2006.Wayne W. Ross hasbeen director ofSpectrum GlobalFund Administration(Cayman) sinceSeptember 2004.He is responsible forall operations of theCayman office. Prior tojoining Spectrum, Mr.Ross was a Directorof Dundee LeedsManagement Servicesand vice president andchief financial officerof The Dundee Bank.Spectrum Global Fund Administration,a leading provider of middle office andadministration services with offices inCayman, Chicago, New York, San Francisco, Columbusand Bangalore, has experienced firsthandthe increased demands stemming from theinflux of institutional investors into the alternativeinvestment industry. Ron Suber, President ofSpectrum, and Wayne Ross, Director of SpectrumCayman, speak to HFM about this movement.HFM: As a provider of middle office andadministration services, are you seeingmore institutional investors investing infund of funds or directly in hedge funds?Spectrum: We are seeing a rapid increaseof institutional investors in both, with thedifferentiating factor often being the experiencethey have investing in the alternativeinvestment sector. As this asset class continuesto mature, many institutions are becomingmore familiar with hedge funds and thetrend is to establish internal resources for directinvestments.Fund of funds remain appealing to manywho feel they gain instant diversification tothe various styles and strategies alternativesoffer. Many institutions continue to invest infund of funds to get access to closed managersand to allow their internal research efforts tofocus on the broader universe, while choosingniche multi-manager products to get exposureto the more esoteric funds.HFM: What additional questions are institutionalinvestors asking about due diligence/ongoing reporting from the providersof middle office and administration?Spectrum: A week has not gone by without aninstitutional investor (fund of funds included)requesting due diligence information aboutSpectrum or one of our clients. Their questionsare increasingly sophisticated. We oftenbegin our interaction with the institutionalinvestors by providing them with Spectrum’sinternal due diligence questionnaire, coveringtopics including our technology, independentstructure, process, procedures, capacity,internal controls, investor relations, ourteam’s global experience, and informationpertaining to our disaster recovery and businesscontinuity plans. Investors are interestedin our valuation, reconciliation, trade capture,and transaction processing methodologies.During the ongoing due diligence process,investors are frequently visiting our globaloffices to meet the team and view comprehensivedemonstrations of our systems. In aneffort to build an enduring relationship andenhance their understanding of Spectrumand the managers’ businesses, we work closelywith our client’s investors to provide the dataand information they require for their allocationdecision as well as part of their ongoingmonitoring of their investments.As institutions demand more transparency,Spectrum, with mutual consent of the investorand the fund manager, has the flexibilityand technology to provide custom risk, portfolio,and performance data. Examples of thisinclude position transparency, performanceattribution by strategy, diversity information,estimates prior to final NAV calculations,income projections, assets under managementcalculations and more.HFM: What new trends are you seeing inthe alternative investment industry?Spectrum: Four things come to mind:n Far fewer funds are self-administeringIndependent and third party administration30 | HFMWEEK www.hfmweek.com

ADMINISTRATION CAYMAN asia-pacific special special report report 2007is now often a strict requirement by investors.The pressure by institutions, as well as thedifficulty in trying to retain qualified staff anddevelop the necessary technology, has led to adecrease in hedge funds self-administering.n Some managers are forced to take a‘multi-admin’ approach.Many hedge funds are forced to have morethan one administrator due to their originaladministrator’s inability to provide servicesfor complex products and strategies, such ascredit strategies, including bank debt, directlending, and OTC derivatives products.n There is a growing demand for more frequentand complex processing, custom datadelivery and enhanced reporting; leadingsome investors to managed accounts.The demands for greater transparency byinstitutional investors and managers has ledmany to request that their administratorprovide them with weekly NAV calculationsand custom data downloads, as frequentlyas daily, to populate trading, risk, CRM, andportfolio management systems. Many investorsrequire separately managed accountsin the instances where they cannot get theinformation and data they now require.Managed accounts however, can createincreased burdens on the managers and can beonerous or not possible with multiple primebrokers and certain strategies such as directlending and private equity.Spectrum has created solutions to satisfythe demands for more frequent processingand has the ability to support managed accountplatforms.n Desire for additional integrated servicesfrom the administrator.As the industry continues to mature, hedgefunds are looking to their administrator toalso provide:n Compliance consultingn Preparation of financial statements inaccordance with GAAPn Due diligence services for institutionalinvestors and fund of fundsn Tax services and supportCompliance consulting continues to generategreat interest from managers and institutional investors to ensure compliance withbest policies and practices, and to lend comfortto their investors.

asia-pacific CAYMAN special special report report 2007LEGALA new investment vehicle in the private equity market – the Special PurposeAcquisition Company – is examined by Richard Fear of Conyers Dill & PearmanSPAC to the futureRichard Fear joinedthe London officeof Conyers Dill &Pearman in April2007 as an associatein the corporatedepartment. He willfocus on investmentfunds, capitalmarkets, bankingand structuredfinance. His privateclient experiencecontributes to thetrust and estateaspect of his practice.The private equity markets have seen thedevelopment of an interesting investmentvehicle which, after a relativelyslow start, now appears to be building a headof steam. That vehicle is known as a SPACwhich, although having a faintly politicallyincorrect feel to it, is an acronym for SpecialPurpose Acquisition Company.SPACs are interesting and unusual because,unlike the familiar model for private equityfunds, they raise investment capital in thepublic markets through an initial public offering(IPO) at a time when they are little morethan a corporate shell and have no operatingtrack record. SPACs give investors the opportunityof participating in transactions thatare generally only available to conventionalprivate equity funds together with the transparencyand liquidity of a listed company.SPACs originated in the US where they weretypically listed on NASDAQ but, as a result ofthe effects of Sarbanes-Oxley and other regulatorychanges, are now more frequently createdas a Cayman exempted company whoseshares are listed on the Alternative InvestmentMarket of the London Stock Exchange(AIM).1. Purpose and structureSPACs are incorporated with the purpose ofraising capital through a public offering ofshares (which are typically packaged withwarrants to acquire further shares at a laterstage) and investing the net proceeds throughmergers or acquisitions in carefully selectedprivate operating companies in a particularbusiness sector. To date SPACs have beensector specific with the investment strategy ofindividual SPACs focusing on a wide varietyof business sectors including mining, technology,energy, healthcare, advertising andregional financial services.A SPAC is typically formed as a Caymanexempted company by a small group of initialinvestors, including the management team.The initial investment group will acquire thepre-IPO share capital at nominal value andwill typically be diluted to a holding of around20% of the outstanding shares after the floatation(equivalent to about 8%–10% on a fullydiluted basis if all the warrants are exercised).The management team will usually comprisea group of professionals with specific experienceand expertise in the business sector inwhich the SPAC intends to invest.In a typical SPAC the management team ismandated through the IPO listing documentto identify one or more target operating companieswithin a specified period of time forpotential acquisition failing which the SPACwill be dissolved.2. Investor protection provisionsTo protect investors from the obvious risksassociated with handing over a ‘blank cheque’,SPACs generally restrict their own activitiesand those of their management team followinga successful IPO. A number of investorprotection provisions have become commonand, although initially dealt with throughcontractual covenants, are now generallyembodied in the constitutional documentsof the SPAC, which in the case of a CaymanIslands exempted company comprise thememorandum and articles of association. Themore important of these protections includethe following:(a) A substantial proportion (usually 85%–90%) of the net proceeds of the IPO will beplaced in an interest bearing trust accountheld by a reputable third party custodian. Theterms of the trust will typically limit the useof the funds to the acquisition by the SPACof approved target companies or the returnof funds to investors in the event that no targetsare approved and the SPAC is liquidated.The balance of proceeds not held in trust willbe used to cover the expenses of the SPACincurred in connection with the identificationof potential target companies and the32 | HFMWEEK www.hfmweek.com

LEGal CAYMAN asia-pacific special special report report 2007conduct of due diligence in relation to them,including the fees of professional consultantsand legal advisers.(b) No target companies may be acquired bythe SPAC without investor approval (typicallyby supermajority vote) and, if the requiredmajority is not obtained, the proposed targetis rejected.(c) Dissenting investors who vote againstotherwise approved investments have theoption of withdrawing from the SPAC andreceiving back their pro-rata share of the trustfund (or alternatively selling their shares andwarrants in the market).(d) There is normally a deadline of between12–24 months from the date of the IPO forthe identification of target companies, conductof due diligence and completion of theacquisitions. In the event that the SPAC failsto complete any acquisitions within the specifiedperiod it will typically be liquidated andthe remaining trust fund distributed to theshareholders. The management team andany other initial investors are not normallyeligible to receive any distribution of thetrust fund in relation to shares of the SPACacquired prior to the IPO.(e) The management team are rewardedthrough capital gains on the shares they retainin the SPAC following the IPO rather thenthrough the remuneration or management feearrangements common in conventional fundsso that the interests of the management teamare more closely aligned with those of investors.In addition the management team aregenerally ‘locked in’ for a specified number ofyears during which they are not permitted todispose of their shareholding in the SPAC.Additional comfort is also provided toinvestors through the publication of an AIMListing Document and the appointment ofapproved professional service providers includinga nominated advisor and broker.3. Pros and consSPACs are a specialist product with bothadvantages and disadvantages when comparedwith conventional funds.On the plus side SPACs provide investorswith special rights including the right toapprove or reject each target company proposedby management and the right to recovera substantial portion of their investment inthe event that no targets are approved. In additioninvestors who may not otherwise qualifyto invest in private equity funds have withthe opportunity to participate in the acquisitionof private operating companies whileretaining liquidity (albeit perhaps limited)as a result of the public listing of the SPAC’sshares and warrants.On the down side investors are exposed toa lack of investment diversity and to the riskof losing the portion of the IPO proceeds setaside to cover expenses in the event that notarget companies are acquired. In additionthe requirement for investor approval priorto the acquisition of target companies mayresult in SPACs being less nimble on theirfeet than conventional private equity fundswith the corresponding risk that opportunitiesmay be lost while shareholder meetingsare convened.4. Future developmentsWhile significant amounts of capital havebeen raised through SPACs, they neverthelessform a relatively small part of the global privateequity market and will almost certainlycontinue to do so.SPACs have evolved during the last fewyears from single acquisition vehicles commonin the US, where the intention andpurpose was to acquire a single targetcompany through a business combinationwith the SPAC, to the multi-acquisitionvehicles commonly found in AIM listings.Future developments may well include thefurther evolution of SPACs from the presentsingle sector investment strategy to multisector investments – thereby more closelyaligning themselves with the diversificationstrategies of conventional funds. So watchthis space.www.hfmweek.com HFMWEEK | 33

CAYMAN special report 2007LEGALEastern promise forCayman law firmWilton McDonald of Truman Bodden & Company says that in a maturing market Centraland Eastern Europe offer good opportunities for new hedge fund businessHFM Week interviewed Wilton McDonald(Wilton) who has teamed up with EwaWisniewska (Ewa) and Marcin Wnukowski(Marcin) of Squire, Sanders & Dempseyto discuss opportunities and demand for offshorehedge funds in Central and Eastern Europe.H FM: What makes the Cayman Islands anattractive jurisdiction for investment byonshore hedge fund investors?Wilton: As the unchallenged global leader in thehedge funds market, Cayman sells itself as thedomicile of choice for new start-up hedge funds.Clients like the fact that the Cayman Islands,a British overseas territory, has economic andpolitical stability, modern infrastructure, mediaand telecommunications, and a highly professional,skilled and stable workforce. These are all majorselling points for the domicile.Moreover, the Cayman Islands MonetaryAuthority (CIMA), the chief financial servicesregulator in the islands, concerns itself withexercising a ‘light touch’ yet fully internationallycompliant regulatory regime.Cayman subsequently prides itself not only onthe flexibility of its laws but the absence of any intrusiveaction on the part of the regulator – as well asthe high level of professionalism and responsivenessexercised by local bankers, lawyers, hedge fundmanagers, accountants and administrators as wellas CIMA and centralised government.The jurisdiction is equally attractive to dobusiness due to its close proximity to theUS markets and absence of any currencyexchange controls or direct taxes on income,capital, capital gains or sales. Furthermore,there are no withholding taxes and no taxeson inheritance.H FM: What is the primary vehicle used insetting up Cayman Islands hedge funds?Wilton: The overwhelming majority of newfunds are structured as Cayman Islands exemptedcompanies. Apart from the obvious benefitsof owning a corporate vehicle, here are a fewattractive features of using an exempted company:a) 20-year tax concession certificate confirmingthat it will not be subjected to Cayman Islandstaxation;b) the names of the shareholders of an exemptedcompany are not required to be filed with theRegistrar of Companies;c) the annual reporting requirements areminimal;d) an exempted company is permitted to issue ‘nopar value’ shares;e) the name of an exempted company may be in aforeign language (most recent additions includeChinese and Arabic) and need not include theword ‘Limited’ or the abbreviation ‘Ltd.’;f) the company can be registered from the onsetor any time during its life as an exempted segregatedportfolio company (SPC);g) an exempted company is not required by law tohold a general meeting of its members.H FM: Tell us a bit more about the local hedgefund market and how you intend to positionyourself and to expand your practice?Wilton: The reality is that, like most industries,there is a high level of concentration ofbusiness in a few hands. Rather than wait forthe slow trickle of business to come to us fromthe mainstream financial markets, small independentfirms such as Truman Bodden &Company (TBCO) have to be aggressive to seekWilton McDonald is anattorney-at-law andhead of InvestmentFunds at TrumanBodden & Company,Grand Cayman,Cayman IslandsEwa Wisniewska isa European partnerat Squire, Sanders &Dempsey, Warsaw,Poland34 | HFMWEEK www.hfmweek.com

LEGAl CAYMAN asia-pacific special special report report 2007out new business in non-traditionalmarkets.Established in the early 1970s, TBCOis a small Cayman Islands firm thathas been successful in servicing nichemarkets and attending to the needs ofa small following of local and internationalclients.There are currently four broad practiceareas within the firm: (i) corporateand commercial; (ii) investment funds;(iii) litigation; and (iv) conveyancingand local practice.TBCO also offers secretarial, limiteddirectorships, registrar and transferagency, and registered office servicesthrough one or more affiliatedcompanies including its primarymanagement company, Trulaw CorporateServices Ltd.The firm is a founding memberof TerraLex, a global network of morethan 155 top independent law firmsand 15,000 attorneys in nearly100 countries.H FM: Why is TBCO venturing intoemerging markets?Wilton: As the new head of InvestmentFunds at TBCO, I am keen on expandingthe firm’s existing base of registered andunregistered funds by venturing intoemerging markets, especially those situatedin Central and Eastern Europe.On the one hand you have the famedB.R.I.C. countries (Brazil, Russia,India, and China). On the other, you havethe most recent EU entrants, viewed byindustry experts as the next most fertileground for development of new business,which include the Czech Republic,Slovenia, Hungary, Slovakia and Poland,ranked in order based upon 2006GDP estimates.Of the foregoing list, Slovenia and theCzech Republic have the highest GDPper capita and are perceived to be onpar with some western member statessuch as Portugal. Market speculatorsare reasonably optimistic that EU integrationand harmonisation will helpboost GDP & GDP per capita figures inthe new entrant markets.Dan Martiuk, managing directorof All-Canadian (Cayman). (ACCL), aCayman-based investment managementcompany, has provided us withfurther background on the evolution ofthe hedge fund market. ACCL is findingeager converts amongst the emergingwealthy and middle classes in Asia,Latin America, and Central Europe.Dan comments that: “The strategyis obvious. There are over six billionpeople in the world with only about300 million in the US, and therefore weexpect our future growth to be centredin the larger, international and relativelyuntapped markets.”Just over half of all US householdscurrently hold some mutual funds whileparticipation rates abroad range from1% to just under 10% of householdassets. At the end of 2005, Asianholdings of funds, as a percentage oftotal household assets, were just 5%compared with 16% in Europe and 21%in the US according to Boston-basedCerulli Associates.“The potential is very exciting whenyou realise how demographics can propelthe natural progress from plain vanillafunds to alternatives as investorsophistication and wealth grows.Cayman and ACCL are well positionedinternationally for future growth,” saysMartiuk.On the Polish scene, Michal Jeziorskireported in the June 2006 edition of theWarsaw Voice that more Poles are discoveringnew ways of investing.Each month mutual funds (particularlyumbrella funds and fund of fundstructures) operating in Poland reportzl.3-4bn (or US$1bn-1.3bn) worth ofnew assets.Foreign hedge funds active inPoland also offer many interesting productswhich include those marketed byMerrill Lynch and Franklin Templeton.In 2006 Franklin Templeton’s sharessold in Poland secured investors anannual rate of return of up to 58 percent.The company plans to ultimately offer44 funds on the Polish market. Britain’sMan is also interested in expandingin Poland.H FM: What has prompted thecurrent focus on marketing Caymanfunds to Poland?Wilton: As one of the former satellitecountries of the former USSR, Polandhas no real history of a hedge fundsmarket or even a financial servicesmarket per se. As far back as the early1990s, insurance, banking and otherfinancial services were historicallyprovided by the state. The financialsector is therefore lagging behindUS and Western European countrieshaving tried to operate under a westernmodel for only the last 15-17 years.Marcin: With respect to the regulationof hedge funds, in July 2005 the PolishSecurities and Exchange Commission(KPWiG) warned investors off hedgefunds, ruling that they were incompatiblewith the EU Directive on openinvestment funds. KPWiG thereforeforbade the activities of hedge fundsin Poland.Ewa: The mood has changed towardsthe regulation of hedge funds and rulesgoverning direct foreign investmentabroad by Polish nationals, however. Itis assumed that the majority of Caymanfunds will not be seeking to activelymarket their respective shares in Polandso as to avoid local regulation and registrationwith KPWiG pursuant to the Acton Investment Funds of 2004.Two recent amendments to Polishlegislation will no doubt have a significantimpact on the regulation andtaxation of foreign investment funds:n an amendment to the Polish ForeignExchange Law will come into force on21 April 2007. The impact of this isthat special permits would no longerbe required to be issued by the NationalBank of Poland in the namesof Polish entities/individuals seekingto acquire an interest in offshore investments(including Cayman Islandshedge funds).n another statutory amendment concernsthe Polish Corporate IncomeTax Law (CITL). Under the revisedversion of the CITL, income from theredemption of participating shares ina specific class or sub-fund; ‘Class A’ ofthe mutual fund (which includes foreigndomiciled funds), together withcases involving a conversion of Class Awww.hfmweek.com HFMWEEK | 35

asia-pacific CAYMAN special special report report 2007LEGALshares to another class of shares in thesame mutual fund are excluded frompaying Polish CIT taxation at the currentrate of 19%.Among institutional investors (whohave surplus funds to invest) andsophisticated and high-net-worthindividuals, there is a growing appetitefor offshore investment products,including hedge funds and other collectiveinvestment vehicles.Moreover, there is a deepeningpolarisation of the local populacewhich creates a larger pool ofthe nouveau riche with resources toinvest in such vehicles.It is understandable that whenmost people in Poland talk about offshore,they generally mean Cyprus andLuxembourg but with the growing costof doing business, investors are willingto consider taking the necessarysteps to structure their investments insuch a way as to reduce their overall taxposition. Who can continue to pass up ajurisdiction like Cayman which imposeszero direct corporation, capital gainsand transfer taxes?Marcin: Due to the close proximity ofCayman to the US markets, Caymanfunds may be more appealing to Polishhedge fund principals wishing toattract a wider pool of qualifying USand Canadian investors into theirrespective fund.Wilton: Right now the bulk of my newbusiness is coming from Russia, Centraland Eastern Europe with new workcoming in on a weekly and sometimesdaily basis.No new business has come out ofPoland yet, but TBCO has a couple ofirons in the fire there, and it is pleasedwith its newly forged relationship withthe Warsaw office of Squire, Sanders &Dempsey.H FM: Are there any obstacles forCentral and Eastern European hedgefund investors wishing to enter theCayman market?Wilton: Assuming continuing levelsof liquidity and buoyancy in the USand Western European securities markets,there are other obvious barriers todoing business with Central and EasternEurope. Most hedge funds are marketedto the rich, and smaller clientsmay not be aware of the unregistered,unregulated type structures which maybe within their financial reach to set upand to maintain on an ongoing basis.Marcin: Most of Europe gravitatestowards investing in competingfinancial centres such as Luxembourg,Cyprus and the Channel Islands. Thuspotential clients may prefer to pay lesstax rather than zero tax in return forusing familiar domiciles.There may also be a lack of technicalknow-how in emerging markets and a36 | HFMWEEK www.hfmweek.com

LEGAl CAYMAN special report 2007low level of familiarity with the offshore territories.The presumption about the hedge fund space isthat it is mainly comprised of sophisticated professionalservice providers and even investors. Thereis a certain level of knowledge that is assumed –and if a client doesn’t have that, it is harder for himto become involved and to develop relationshipswith the major parties involved in starting a fund.H FM: What’s your final word on cultivating successin an emerging hedge fund market?Wilton: Ewa, Marcin and I all agree that it isabsolutely vital to build strong working relationshipswith a handful of experienced serviceproviders including investment managers – suchas All-Canadian (Cayman) Limited – and fundadministrators - including CIBC Bank and Trust(Cayman) Limited and Cayman National Trust Co.– who have acted for and have each demonstrateda keen interest to consider proposals from smallercaphedge fund start-ups.Each of the foregoing service providers istherefore committed to investing in what may betermed the next big wave of new business in thehedge funds arena.The grave challenges experienced in seekingout sponsors and administrators willing to assistsmaller cap hedge funds with average first yearcommitments from seed investors of betweenUS$5m and US$10m.Most of the ‘blue chip’ investment banks andadministrators refuse to touch any new businesswhich falls short of meeting certain financialand qualitative parameters; in other words, aminimum seeding of US$50m in projected fundingfor the first year, and a track record of at leastfive years investment funds experience for thesponsor or principals of the fund.Nevertheless, the outlook for 2007 appearspromising for investing in emerging market countriesbased in Central and Eastern Europe. The keyis to adopt an open approach to help educate andinform potential investors of the benefits whichcan accrue to them from investing in offshoremarkets such as Cayman. Through careful planningand collaboration with onshore counsel andkey service providers we are confident that we willbe able to create an attractive tax efficient structurethat can be replicated for multiple clients –this would be the perfect ensemble for all stakeholdersconcerned.Marcin Wnukowskiis a senior associateat Squire, Sanders &Dempsey, Warsaw,Poland.

asia-pacific CAYMAN special special report report 2007LEGALBest of both worldsNick Reid of Solomon Harris explains the upside of having side pocketsNick Reid is a seniorassociate at SolomonHarris and specialisesin investment funds.Solomon Harrisis a full servicecommercial lawfirm specialising ininternational offshorework with a numberof niche areas ofactivity. The firm’sreputation has beenbuilt on its consistentresponsiveness toclient needs andits straightforward,commercially focusedadvice.In a marketplace that is becoming morecrowded and competitive by the day,many multi-strategy hedge funds havebegun looking beyond their traditional huntinggrounds for new opportunities.The general consensus is that, on average,private equity funds have been outperforminghedge funds lately. Many hedge fundshave now seen the tremendous potentialoffered by the comparatively illiquid assetsnormally considered the domain of thoseprivate equity funds and have decided it istime that they got into the fray. In a breakfrom the norm, a growing number of hedgefunds have begun broadening their horizonsby investing significant proportions of theirportfolios in an increasingly unusual andoften illiquid array of assets.As a consequence, hybrid funds have evolvedwhich combine the liquidity and simplicity ofa typical hedge fund with the illiquidity andgreater complexity of a typical private equityfund. In many cases, the lines between thetwo types of funds that once more or less representedthe different ends of the spectrumhave become somewhat blurred. However,this convergence of approaches has presentedthe industry with many practical issues whichit has had to reckon with and quickly resolve.Illiquid assetsWhereas most private equity funds aredesigned specifically to deal with the inherentdifficulties posed by illiquid assets (withno rights for investors to redeem and deferredcompensation for fund managers being thenorm), most hedge funds, in contrast, havetraditionally been designed with relative simplicityin mind (with rights for investors toredeem and compensation for fund managersbased on NAV being the norm).By their very nature, illiquid assets do notnaturally sit well in the traditional hedgefund structure. As such, the new hybrid structureshave, out of necessity, had to developdual systems (and new devices to go withthese systems) within their structures whichare effectively able to deal with both liquidand illiquid assets. So called ‘side pockets’ (or‘designated investments’) were born out ofthis need.Side pocket explanationSide pockets are devices within a hedge fundstructure that permit illiquid assets or comparativelyhard to value assets (or assetswhich may become such) to be designatedas such and then hived off from the rest ofa hedge fund’s portfolio so as to be housedin their own specially created compartments(or side pockets) within the hedge fund. Thepower to side pocket is normally mandatedto the fund manager, with the parameters oftheir powers being fully disclosed in the offeringdocuments of the hedge fund.Once side pocketed, the assets are treatedseparately from the rest of the hedge fund’sportfolio with each side pocket having its owndistinct provisions (for redemption, compensationand such like) which generally prohibitentry into the side pocket by new investorsand, likewise, exit from the side pocket by theexisting investors.On the side pocketing of assets, existinginvestors, with an interest in the particularside pocket, are, at that point, effectivelylocked into that side pocket, as far as thoseassets are concerned, whilst being free toredeem out their remaining investment in therest of the hedge fund’s portfolio. Side pocketscan thus be thought of as specially creatablesub-funds of a hedge fund with their ownunique provisions.Side pockets have had some bad press asof late. It has been argued that the system isopen to abuse by fund managers who wishto massage their figures by shunting poorlyperforming assets out of the way, into oneof the hedge fund’s side pockets, essentiallyhiding the bad picks to artificially hypethe performance of the general portfolio– and consequently to inflate their compensationwhich will be based upon the performanceof the hedge fund’s general portfolio.38 | HFMWEEK www.hfmweek.com

LEGal CAYMAN asia-pacific special special report report 2007Nonetheless, side pockets are building afavourable following with many investorswho see that they are perhaps the fairest wayto deal with the difficulties posed by illiquidand comparatively hard to value assets.Avoid potential pitfalls of side pocketsMost investors in hedge funds fully understand therisks associated with their investment and aresophisticated enough to grasp the concept ofside pockets. With proper disclosure of the inherentrisks associated with illiquid assets ina fund’s offering documents, there is no reasonwhy side pockets should not be utilised.These, more often than not, avoid thepotential pitfalls associated with illiquidassets and, as such, help alleviate inequalitieswhich could otherwise result.For example, they avoid the difficult task oftrying to value an illiquid asset each time aninvestor wishes to enter or exit a hedge fund.Likewise, they avoid the ‘last man standing’scenario where a hedge fund withoutside pockets holding a variety of liquid andilliquid assets will inevitably liquidate itsliquid assets first to redeem out any exitinginvestors thus leaving the remaininginvestors stuck with the illiquid assets andthe potential risks associated with these.While there is little doubt that derivationsof side pockets have been utilised by some ofthe more creative hedge funds for many years,it is only now that they are becoming moremainstream and, as such, gaining more publicity.As with any relatively hot new issue, itis inevitable that there will be some degreeof initial skepticism and paranoia from theregulators.However, the industry, investors and serviceproviders included, now has a much betterunderstanding of what side pockets areand how these should be treated and, indeed,their use is now being actively encouraged inmany circles.In many ways, side pockets allow hedgefunds to enjoy the best of both worlds – thespeed and simplicity of the average hedgefund with the longer term approach of theaverage private equity fund – all convenientlywithin the same hedge fund managed by thesame fund manager. Ultimately, that can onlybe of benefit to the investor.www.hfmweek.com HFMWEEK | 39

asia-pacific ADMINISTRATION/CUSTODY special report CAYMAN special report 2007Greg Bennett of Butterfield Fund Services discusses pending AIMA valuation standards,industry best practice and the impact on administratorsAn ever changingindustryGreg Bennett is aDirector of ButterfieldFund Services(Cayman) Limited,with responsibility forbusiness developmentand client relations.As the ever evolving hedge fund industrycontinues to grow and develop, and as thesearch for alpha becomes more difficult,trading portfolios are becoming ever more esoteric.The result is that valuation remains a centralissue of the industry.For example, whereas convertible arbitragestrategies were amongst the most difficult tovalue portfolios a few years ago, we are now seeingincreasing numbers of derivatives, ranging fromstraightforward CFDs and interest rate swapsthrough to more complex credit- and weatherbasedproducts. Not to mention the proliferationof asset backed and distressed fixed incomeholdings.At the same time, there has also been a mergingof the hedge fund and private equity spaceresulting in hedge funds holding illiquids, requiringthe need for special accounting and liquidityrestrictions.Framework for fair valueSupporting these events are recent publiccomments on valuation and similar by anumber of industry relevant groups.These include the International Organization ofSecurities Commissions and their Objectives andPrinciples of Securities Regulation (the IOSCOPrinciples), which provides guidelines for simplifyinghedge fund disclosure; the recently releasedFinancial Accounting Standards Board EnhancedGuidance for Measuring Fair Value (FASB 157),which defines fair value from an accountingperspective and establishes a framework for itsmeasurement; and the Alternative InvestmentManagement Association’s (AIMA’s) recentlyissued Guide to Sound Practices for Hedge FundValuation.As a result, funds are starting to develop,disclose and apply much more detailed and stringentvaluation guidelines. This is in contrast to themore generic ‘boiler plate’ disclosure that has historicallybeen included in offering memorandums,which may have sufficed for the valuation of majorexchange traded securities with a high degree ofliquidity but nonetheless provide very little valuein terms of the more esoteric portfolios.Industry best practiceIn this regard, and consistent with AIMA’s original2005 Asset Pricing and Fund Valuation Practicesin the Hedge Fund Industry, responsibility for thevaluation of a fund’s portfolio ultimately resideswith the fund’s governing body (directors, generalpartner or trustee – depending on the structure).As such it is up to the governing body to establishthe valuation policies of a fund, in consultationwith the other stakeholders.As is industry best practice, these policies needto be robust, workable and consistent with thenature of the securities the fund trades.For example, if independent pricing sources arenot readily available for certain portfolio holdingsand models are used, these models and inputsshould be independently tested and verified. Onceestablished, the production of the NAV, in accordancewith these policies, can be delegated to athird party service provider.Also as noted above, the trading of illiquids andthe resulting use of side pockets is another hot buttontopic. Side pockets are accounts used to separateilliquid assets from other portfolio holdings inorder to ensure a fair allocation to investors. Oncesegregated, only investors of record at the time ofsegregation are entitled to an interest in these securities,and, if an investor holding a side pocketwww.hfmweek.com HFMWEEK | 41

CAYMAN special report 2007asia-pacific ADMINISTRATION/CUSTODYspecial reportredeems, they will only receive their pro ratashare from the side pocket once the illiquid becomesliquid and, most typically, has been realised.Effectively side pockets are used to account forwhat amounts to a single private equity holdingwithin a hedge fund structure.Establishing a clear policyIn terms of fund governance, the most importantissue is ensuring there is a clear policy (again establishedby the fund’s governing body) for determininghow liquidity issues are resolved. For example,in determining the applicability of transferring asecurity in to a side pocket, the main issues are asfollows:n Side pockets should be reserved for securitiesthat are truly illiquid and not just difficult to value,or even more importantly, securities that aresimply performing poorly.nSecurities should remain in the side pocket untilthey are no longer illiquid – typically once a triggerevent has occurred such as a public offeringand the holding has been sold and the resultinggain or loss realised.nBest practice on the fee side tends to be to chargemanagement fees but defer performance fees untilgains are realised.Correct proceduresObviously much of the concern around side pocketscentres on the potential ability for the investmentmanager to move securities in and out of aside pocket to manipulate the primary NAV of thefund and/or their performance fees. As such thisis another area the governing body should clearlydetail the appropriate policies and procedures andmonitor on an ongoing basis.The end result of these valuation and liquiditydevelopments is that the job of the administratoris becoming ever more difficult, particularly asinvestors and managers look to receive informationon an ever more frequent and timely basis.In addition, Sarbanes Oxley has resulted in manyinstitutional investors requiring that service providersto the funds confirm that they have properlydocumented and tested controls, in many cases demandingspecific control audit reports such as theStatement of Auditing Standard 70.As a result, most administrators have devotedextensive time and energy to developing and enhancingtheir control environment to the benefitof investors. Another result has been that many investmentmanagers have also matured and developedout of a fully segregated back office function,completing trade reconciliation and reporting ona daily basis.As such, many large sophisticated funds arelooking for administrators to serve primarily asanother independent check in terms of the verificationof the existence of assets, review of pricingand recalculation of fees.In these cases such a review would consist ofcompleting contractually agreed procedures, ratherthan maintaining the full books and records ofthe fund.Finally, as the industry continues to evolve andevelop ahead of available guidance, service providerswill be required to continually review andupdate their service offerings to meet the developingdemands of funds and their investors.42 | HFMWEEK www.hfmweek.com

The Offshore Law FirmCaymanConyers IslandsIf you want advice on the laws of the Cayman Islands,or even Bermuda or the British Virgin Islands, the choice is clear.www.conyersdillandpearman.comBERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS DUBAI HONG KONG LONDON SINGAPOREConyers Dill & Pearman advises on the jurisdictions of Bermuda, British Virgin Islands and Cayman Islands.

Local insight,International perpectiveLeading provider of audit,consulting and corporateadvisory servicesRSM Cayman Islands and RSM (British VirginIslands) Limited are part of RSM Robson Rhodes,a member firm of RSM International, one ofthe world’s largest international network ofaccountants and consultants with global resourcesof 24,000 staff in over 72 countries.RSM Cayman IslandsP.O. Box 1370Grand Cayman KY1-1018Cayman IslandsT: 1 345 949-7100F: 1 345 949-7120www.rsmcaymanislands.comRSM (British Virgin Islands) LimitedP.O. Box 4259Road Town, TortolaBritish Virgin IslandsT: 1 284 494-8520F: 1 284 494-3529www.rsmbvi.com

asia-pacific DIRECTORSHIP special SERVices report CAYMAN special report 2007Allison B. Nolan, managing director of Athena discusses the new key service providersfor hedge fundsInvestor comfortAllison B. Nolan is themanaging directorof Athena and leadsthe provision ofdirectorship servicesfor the company, withparticular emphasison services to theinvestment fundsindustry.From her background as a partner in aleading offshore law firm and her transactionmanagement experience, Allison hasdeveloped a wealth of expertise in the internationalfinancial services arena and has extensive knowledgeof the legal and regulatory framework in theCayman Islands and other offshore jurisdictions.This experience and her commercial approachmeans that she is able to offer an unparalleledexcellence of service as an independent director.Cayman’s dominanceThe Cayman Islands continue to maintain theirdominance in the offshore hedge fund world andan intrinsic part of this is the high quality of serviceproviders available to meet the needs of thisburgeoning industry. Legal and accounting firmsof the highest calibre have been entrenched inCayman for a number of years as have a growingnumber of fund administrators. However, thepast couple of years have seen the inaugurationof firms and individuals providing the service ofindependent directors to hedge funds and tooffshore investment management companies in anunprecedented spurt of growth in this field.The provision of independent non-executivedirectorship services is somewhat voluntarily regulatedin Cayman. If an individual acts as a directorfor a hedge fund, he or she does not have tobe licensed or regulated by the Cayman IslandsMonetary Authority (CIMA) just for providingthis service. However, under the Cayman IslandsCompanies Management Law, a firm providing theservices of independent directors can apply for aCompanies Management Licence to regulate theprovision of these services.The number of hedge funds has increased dramaticallyin the past three years but the number ofCompany Management Licences has also increasedand, assuming that a portion of these representdirectorship services rather than the provision ofregistered office/corporate maintenance services,this growth shows the importance that hedge fundmanagers are now placing on this role.So, who are these independent directors andwhy the increase in demand for this service?One of the most interesting aspects is theprestigious nature of the individuals comingforward. From backgrounds in fund managementand administration, legal, accounting and otherrelevant spheres, the latest professional independentdirectors are very much a force to be reckonedwith. These director service providers have comefrom high level positions from managing directorsof Cayman Banks to the former chief Caymanregulator in the industry, the former head ofCIMA’s Investment Services Division. The ‘raisingof the bar’ in the standard of professionalsproviding this service is extremely encouraging andadds credence to the role of independent director.Increasing awarenessThe increase in demand is partly fuelled by a risingawareness of the issues involved in soundcorporate governance rather than the traditionalrationale behind appointing a non-executive funddirector – such as tax issues. In practical terms,independent non-executive directors are custodiansof the governance process in a hedge fund.The US has adopted a legislative approach tocorporate governance which is reflected in theSarbanes-Oxley legislation and new listing rulesand which looks to achieve greater transparencyand a larger degree of independence in the compositionof the board of directors. This has filteredthrough to the US fund managers who select themembers of the board of an offshore fund.The UK has a relatively advanced approach tocorporate governance in comparison to manyjurisdictions and issues of accountability andtransparency have been evolving for over adecade. Similarly, the importance of sound corporategovernance has been recognised in the CaymanIslands for many years and applied byprofessionals in the Cayman hedge fund industry.Collectively as the hedge fund industry becomesmore sophisticated, the expectations on nonexecutivedirectors have risen and there is a greaterwww.hfmweek.com HFMWEEK | 45

DIRECTORSHIP/MANAGEMENT2007 CAYMAN special report 2007CAYMAN special reportasia-pacific DIRECTORSHIP special SERVICES reportdegree of meritocracy in the selection of the independentdirectors of a fund. Furthermore, fundmanagers are increasingly seeking to providecomfort to their investors by the appointment ofdirectors who are independent from not only themanagers themselves but other service providerssuch as the administrators of the fund.A significant development in this area last yearwas the founding of the Cayman Islands chapterof the Alternative Investment Managers Association(AIMA) to foster sound practices in thehedge fund industry in the jurisdiction. AIMA’sOffshore Alternative Fund Director’s Guide (theDirector’s Guide) was published in June 2005and provides a useful insight for managers andpromoters of hedge funds as well as the independentdirectors themselves. The Cayman chapter of AIMAhas set up a working committee in relation to theprovision of independent directors which willfocus on the recommendations in the DirectorsGuide and develop and tailor these to a CaymanIslands perspective.Collective experienceThe AIMA Director’s Guide explores the practical,legal and regulatory considerations in the appointmentof independent directors, details the tasksand duties of the directors and sets out requirementsand advice on several important issues. TheDirector’s Guide stresses the importance of havinga board with the necessary collective expertise tounderstand the fund’s trading and the underlyinginvestments of the fund.Factors that the AIMA Director’s Guide suggestsshould be considered when appointing a directorto the board of a fund include skills, experience,age and other commitments. Skills and experienceare self-explanatory but it is important to note thatthe suggestion is to have a broad, complementaryrange of expertise. Regarding age, this would seemto suggest not only an avoidance of very younginexperienced directors but possibly also seniorretirees who may not be focused on keeping up todate with recent trends and legal and regulatorydevelopments.It is important to ascertain the level of othercommitments that a prospective director of ahedge fund has in advance of the appointment.While in the Cayman Islands there is no regulatorymaximum number of directorships that anyperson may hold, it is prudent to avoid individualswith large numbers of board appointments. Adirector of a Cayman Islands fund is not requiredto give continuous attention to the business of thecompany but nevertheless should have the capacityto devote sufficient time to the affairs of the fundand in particular any extraordinary matters thatmay arise. In addition, by a provider of independentdirectorship services curtailing the numberof directorships that they hold this will reduce thepossibility of conflicts of interest arising betweenthe various funds on which they are a memberof the board.To ensure good corporate governance, a directorof a hedge fund must be kept appraised of theactivities of the fund and central to this is the provisionof reports and information from the manager,administrator and other service providers as wellas holding regular board meetings. The optimumnumber of meetings in a year varies from fund tofund but should be sufficiently frequent to enablethe board to perform its role effectively.While meetings held by conference call and unanimouswritten resolutions have an important role infacilitating frequent board decision making andreview of the funds activities, there is no substitutefor face-to-fac e board meetings. Equally itis desirable that an independent director meetswith the investment managers at regular intervals,preferably at their offices in order to have a feel forthe business and see their operation in place.The heightened awareness of the importance ofthe role of an independent director of a hedge fundis heartening as is the calibre of professionals nowoffering this service in the Cayman Islands. Ratherthan paying lip service to a corporate governanceideal, today’s professional directorship serviceproviders are able to add value in real terms to theoperation of the fund.46 | HFMWEEK www.hfmweek.com

London Dublin Cayman New YorkGlobal professional servicesfor the investment industryKinetic Partners is the only global professionalservices boutique offering audit & assurance, tax,consulting, forensic & corporate recoveryservices to the investment industry.wwwkineticpartnerscom

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Administration CAYMAN asia-pacific special special report report 2007Christopher Lumsden of the Cayman National Group highlights the continuing success ofboutique administration in the world’s premier hedge fund jurisdictionUnrivalled standardsThe Cayman Islands has long been thejurisdiction of choice for the establishmentof hedge funds and the main factors whichhave contributed to this position – a well-establishedinfrastructure, an effective but ‘light-touch’regulatory environment, and a high standard ofservice providers – have remained consistent.On a wider front, the funds industry hasexperienced increasing levels of attention fromthe Financial Services Authority in the UK andSecurities and Exchange Commission in the US– which has been viewed by some as a potentialthreat to Cayman’s attractive framework. The otherside of the argument is that increased regulatoryoversight of hedge fund advisors may have apositive impact on the operational aspects of someadvisors’ businesses, for example with mandatedrequirements regarding the ‘back-office’ functions,and that this will strengthen the industry as awhole through increased investor confidence.Recent changes to the Cayman Islands lawThe role of administration in Cayman’s fundsindustry has been given greater prominence inrecent months, owing to the amendments to theCayman Islands Mutual Funds Law that came intoeffect in November 2006.One of the key amendments gives CaymanIsland administrators additional responsibilitiesto ensure that a fund’s promoter is of sound reputation,that its administration is undertaken byappropriately qualified staff and that its business isconducted properly.These changes should serve to reassure investors,particularly in the institutional sector, thatinvesting into Cayman Island administered hedgefunds is a reliable proposition.From an administrator’s perspective, noneof the recent changes to the law is likely to havea dramatic impact on operations. The previouslegislation was already tried and tested and the lawwas straightforward and flexible enough to allow abroad range of fund structures to be domiciled inthis jurisdiction.The amended law is therefore considered to besimply an improvement to an already successfulpiece of legislation, but one which will continueto assist the Cayman Islands in maintaining itscompetitive advantage.Global administrators vs boutiquesBroadly speaking, the fund administrationindustry can be simplified into two main strata -the high-volume, large scale global players and theboutique operators.The global administrators generally servicea different segment of the market to thoseserviced by boutique administrators. TheCayman Islands has a deep pool of both typesof administrator, allowing the full spectrum ofoffshore funds to be serviced here. The scale of thelocal administration industry gives it strength andboutique players are a key element.Most boutique administrators have independentadministration as their core business andprovide basically the same services as the ‘biggerbrand’ service providers, in terms of such things asindependent portfolio valuation, calculationof fees, maintenance of books and records andprovision of shareholder services.Where boutique administrators differentiatethemselves is both in their willingness to embraceand understand the peculiarities of a fund manager’sproducts and in their service levels. The globaladministrators usually have less flexibility regardingthe types of funds that they will service andthey may reject legitimate business should it not fitwithin their standards. Boutique administratorsare typically much more adaptable.The boutique’s strength and reputation rests onhigh service standards and in engaging staff whoare conversant with the individual complexities ofeach client’s business.At Cayman National a significant proportion ofour new business is derived from existing clientreferrals. While this is an excellent indication ofthe high levels of service we provide, it also underlinesthe importance of fostering and protectingour reputation.In order to retain these high service levelswe have placed great emphasis on growing ourcapacity in advance and in anticipation of addedChristopher Lumsdenis senior vicepresident, MutualFunds within theCayman NationalFinancial Group. Hehas been involvedin the analysis andadministration ofhedge funds for over10 years.www.hfmweek.com HFMWEEK | 49

asia-pacific CAYMAN special special report report 2007Administrationbusiness to allow us to successfully build on oursuccess to date.The impact of institutional investorsThe primary driver of the phenomenal growth inthe hedge fund sector over recent years has beenthe recognition of hedge funds as an acceptableasset class by institutions and the resultantincreases in capital allocations.In contrast with the traditional high net worthhedge fund investor, who has been mainly concernedwith the risks and returns of the investmentportfolio, institutions analyse the structural,as well as the investment risks.The institutional focus on structural risksincludes carrying out due diligence on the workof fund administrators and most astute fundadministration companies, whether global orboutique, have consequently organised themselvesto meet the expected standards. Cayman Nationalhas long recognised the need to structure its activitiesin line with the expectations and demands ofthe institutional investors and therefore operateswith defined policies and procedures which areoverseen by an effective compliance department.Additionally, we recruit highly and appropriatelyqualified staff and use robust fund administrationsystems. We have a well-designed and tested businesscontinuity plan and carry out our pricing andvaluation work entirely independently of investmentadvisors.Retaining Cayman’s advantageCayman still retains its first mover advantageover many other hedge fund domiciles althoughthe market is increasingly competitive. Severalfinancial centres have observed the success of theCayman Islands and have attempted to emulateour formula. The last few years have seen muchrevision of fund legislation around the world asdifferent jurisdictions try to make themselves moreattractive.The recent changes to the Mutual Funds Lawreflect the Cayman Islands’ appetite to maintain itsdominant position. In addition to the user-friendlylegal, regulatory and tax environment, the jurisdictionalso provides unrivalled standards of excellencein its professional service providers - includingaccountants, attorneys and administrators,whether global or boutique.50 | HFMWEEK www.hfmweek.com

Successful HedgeFund Administration?It’s a question ofpartnership.When it comes to hedge fund administration, you need toknow you are working with a provider you can rely on. AtUBS, our years of experience in administering hedge fundassets now totaling around $160 billion, allow us to offer thesolution you need. One that is flexible, bespoke, draws on abreadth of services and accesses state of the art technology.But more importantly, it’s delivered through a professionalsingle point of contact, based from our offices in the CaymanIslands, Ireland or Canada. That’s because we believe successfulhedge fund administration is all about the relationship webuild together, which can give you confidence to focus onyour core business. It’s what we call ‘You & Us’.Find out more by visiting www.ubs.com/fundservicesor e-mail us at fundservices@ubs.comementIGlobal AssetManagementIInvestmentBankYou & Us© UBS 2007. All rights reserved.